Should you pay off debt or prioritize buying a house? A 27-year-old Canadian recently asked that question on Reddit (NYSE:RDDT) while detailing their situation.
The individual has 1,500 Canadian dollars ($1,084) in savings and CA$11,000 in credit card debt at 12% APR. The 27-year-old also has a CA$4,000 car loan at 7.99% APR and CA$1,500 in monthly expenses. The monthly take-home is CA$3,300 after taxes.
Pay Off Debt First
Redditors overwhelmingly told the 27-year-old Canadian to pay off the debt first.
"We are in the same boat, and I think we know the answer. Aggressively pay down the debt to avoid interest," one commenter said.
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The Canadian has two financial obligations, but the individual should prioritize credit card debt over the auto loan. The credit card has a much higher APR than the auto loan. A higher APR results in more interest accumulation, but paying off the balance rapidly minimizes how much interest accrues on the balance.
"You can’t start saving for a house right now," one commenter said. "12% outpaces average market growth, so it only makes sense to sit on that debt if you plan on investing your money pretty aggressively and feel confident you can make a better ROI than that 12%."
Work On A Side Gig
You can pay off debt faster by reducing expenses, but there's only so much you can do to keep your costs low. The Canadian earns CA$3,300 per month after paying taxes. It's possible to pay off the credit card eventually, but the 27-year-old can benefit greatly from picking up a side hustle.
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"Maybe start doing some gig jobs for extra side income," one commenter suggested.
The Canadian said they're already working on a side hustle and currently earn an extra CA$1,000 per month with freelancing. The income isn't guaranteed, but it is a good starting point and works with the Canadian's schedule.
You don't have to work on a side gig forever. Some people only work on side hustles until they have paid off their credit card debt, while others turn side gigs into full-time work.
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Invest Money Before You Buy Your Home
Once the Redditor pays off their credit card debt and auto loan, it will still take some time before they are ready to buy a house. A home is quite expensive, especially if you want to put 20% down.
While the Canadian waits for the perfect opportunity to buy a home, they can invest their cash instead of storing it in the bank. Index funds offer a good starting point, as they offer instant portfolio diversification across various companies and sectors.
"Find a way to invest money now, even if you have to save a little at a time and then invest," one commenter said.
The Canadian can start by paying off the credit card debt and shift the remaining money into assets after the balance is paid off.
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