Pay-Off Debt or Invest?

Pay-Off Debt or Invest?

Many of us face this dilemma – Should I use surplus money to pay off existing debt or should I invest? It’s definitely not an easy decision to make. This decision can either make your future or put a massive dent on your future plans. Yet, before taking a decision, it is very much important that a proper research is done on it, realizing its Pros and Cons and only then going ahead with your decision.
Steps to take and factors to consider before you make the right choice.
List Down Your Debt – List down all the debts that you have either in Excel spreadsheet or on a piece of paper. Write down the debt amount, interest rate and duration for each loan. Indicate if any of the loans qualify for tax deduction. For example, if you have taken an education loan either for yourself or your spouse or child, the interest payable is eligible for tax deduction. The principle and interest amount in a home loan availed of are eligible for tax deduction.
Do you have an Emergency Fund? –Check your cash and bank balance. Do you have money to take care of emergencies, unfortunate events like medical issues, job lay-off etc. The amount should be equivalent to 3 to 6 months of your expenses depending on your lifestyle and family situation. If you do not have enough emergency fund, use some of the surplus amounts to manage it.
Calculate – Check the interest rates. Normally the personal loans or credit card debt have higher interest rates and are basically consumption oriented. It is best to pay off these loans first as the interest would only be eating into your savings account and you do not build any assets with these loans.
Emotional Aspect – Yes, it is important to at least consider your emotions. What do you like more- Being debt free or taking some risk by using the surplus to invest in some assets which might give you better returns? If you are not a good saver, you have options to continue with EMI and try hard to save. You should know your risk taking ability and tolerance. Would you feel awful, if you realize later on that the equity markets or any other investment that you understand did very well and you would have made much more money investing there than paying off debt? Consider your personality and emotions before taking that decision.
In a way, it is better to pay off your debts that are costly to service. Paying off debts saves money. At the same time, it is important to invest in assets to generate returns and build wealth. You should use some of the surpluses to pay off loans like personal loans and invest the remaining amount in assets that give optimum returns depending on your risk profile and financial goals.

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