Should I invest or pay off debt
Should you take efforts to reduce your share of that credit card, student loan, and housing loan, or place your money in retirement savings account or other investments like mutual funds, stocks?
Should they use the money to pay off or at least, substantially pay down that pile of debt they’ve accumulated, or is it more useful for them to put the money to work in investments that will grow for the future? Either choice can make sense, depending on the circumstances.
The answer is, you should try to do both.
But let’s look at the factors that go into prioritizing investing versus debt payoff.
As a general rule, if you can earn more returns on your money by investing it than your debts are costing you, then it makes sense to invest. For example, if you have a loan with an interest rate of 6.5% and a stock market, mutual fund investment that is returning 10% or higher in a year, you’ll invest your extra cash in those instruments and not pay off loans.
On the other hand, if you have credit card debt or a personal loan at 15%, you would be better off putting your extra cash toward paying that debt rather than investing it in stocks or Mutual funds.
In all this role of an emergency fund is important. You should always have an emergency fund of 5-6 months of your current monthly income. After this, we have to think about surplus money to be invested or use it to pay off debt.
But in most cases, Paying down debt vs. investing doesn’t have to be an either/or decision. You can, and sometimes should, do both. One should not give excuse that he/she is broke and cannot save money after paying debts monthly. In that case there will also be need of financial discipline and advisor's counselling.
Invest consistently with a certain amount of your savings. Prioritize the loan payoff. Start paying off loans that have a higher interest rate first. once you pay off those small high-interest rate loans, you can transfer that EMI amount to monthly SIPs, the good EMIs.
Virtually no investment can provide a reliable return of 15% or more that’s comparable to your high-interest credit card loans or personal loans. But the average person should always make monthly progress on both their financial goals, retirement corpus, and paying off debt.
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