Keep my debt and invest my money or should I first pay off my liability? This is a very tricky question for all, and one needs to really analyze before taking the call.
Taking students loan or home loan has increased in the last decade and we can’t forget the credit card debts too. But what should you do, pay your debt off first or should you invest for your retirement? The answer is “Go for both” by weighing them properly.
When you are budgeting always make room for your debts, investments and emergency funds. As all these are important factors and not an either-or situation where you will choose what you like and put your money there.
So how do you gauge what is important and what needs to be paid first?
Interest rate: How much does your debt cost you in interest? If it’s a credit card interest, it could be anywhere around or above 15% while home loan or student loan could be less at around approx. 8%. The point to keep in mind is, the investment may get you 10% in a year, but if it’s a credit card loan pay it off first because if it keeps mounting, there is no escape from it. And also, you are in a loss here because you are getting 10% in investing but paying 15% or more in interest for your credit card debt.
Amount of debt: We all know that your debt marks your credit score. Higher the amount, poor your score will be. Also taking high debt or more debt will stop you from getting a new one when need arises. So, you need to keep an eye on your amount.
Time to Retire: Are you still young and paying off your student’s loan? You have good 30 years before you retire. Spend 70% in paying off your debt but also keep 30% for investing as we know the earlier we invest, the better the returns. This way you have tapped both.
But if you are in your mid 40 or in 50’s, you don’t want to carry your debt to your retirement time. You will invariably pay your retirement income towards your debt. So, clear your debt before you sit back and relax during your retirement. Cut down your spending’s, work few years more and save more.
Allocation of invariable income or inheritance: When you receive a significant amount of money as a bonus or as a part of inheritance, you again need to first budget it wisely. After saving well for your emergency fund, pay your debts. As a huge sum of amount would bring down your term or EMI down significantly. If the amount you received is much more than your liability, the answer is simple, pay it off completely.
The main point here is that you need to tackle your expensive debt first. No investment will fetch you 15 or 20% returns and credit card debt will only keep increasing if you keep pushing it ahead, in that case, focus more on your debt payment. Because if you commit yourself to saving more and pay less towards your debt, you will land up paying more in interest than what you will earn from your investments.
Another thing to keep in mind is to bounce back once your debt is paid off. For example, you cut down on your savings to pay off your debt first, once your liability is over, increase the amount you pay towards your savings. So, if earlier you were paying INR 20,000 towards your debt and reduced your retirement amount to INR 10,000, you can again increase it to INR 20,000 or even INR 30,000 once you are debt free.
In the end, it’s all about prioritizing and weighing before you make the decision to shift towards any one thing. But ideally, keep a balance of both so that you don’t completely loose out on anything.
In my next blog I will talk about ways to manage debt. So stick around and I hope my articles are coming of some help to my readers and adding value to them.
Till next time
This blog is a part of Blogchatter’s #blogchatterA2Z challenge.