The Arguments for Investing Over Reducing Debt

Everyone is encouraged to save as soon as they can. Most people who go to college in the USA do so with the help of a student loan that needs to be repaid, even though the terms and conditions are rarely as hard as normal $5000 realistic loans. A fair number of students need extra help as well and many turn to the convenience, and seemingly easy credit on a card. Problem is that a high rate of interest is applied to any balance left at the end of the month after a minimum payment is made.

There are always competing demands for the monthly pay check. They include simple daily living expenses, any debt repayments and saving, including retirement, a possible deposit for a mortgage and ideally to create an emergency fund.  There is no definitive answer to this question with much depending on the individual.

The effects of a course of action is the rational answer to the question; what produces the greatest financial benefit? If you are paying a high rate of interest on a credit card you should seriously consider paying that off as a priority, even if it involves doing so by taking out a personal loan at a lower rate of interest.  If you have no expensive debt then if you can expect a high rate of return by investing then do so and stick with the minimum repayment policy. However, from the emotional standpoint, if you hate being in debt, then you should get rid of it as a matter of urgency. Balancing the two, debt and investment, is the middle route.

Ideal Courses of Action

Financial management is not taught at school and even people who work in math and financial sectors don’t necessary live their lives to a disciplined budget. They should, and should do a few basics. These are things that you should do yourself:

Set up an automatic payment system so that each of their financial commitments, either monthly repayments or money being set aside for saving is sent to the appropriate places automatically as soon as the pay check comes in.

Recognize that emergencies do occur and try to set up a fund to address any that happen. If it is in an accessible account but earning interest, you can use it to pay any unexpected bill rather than add it to an expensive credit card balance.

investment options

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Understand the power of compound interest. If you start a retirement plan early, with your contributions matched by your employer, you will be amazed how quickly your fund will grow.

Get rid of high interest debt. The example of a credit card balance is as good as any. If you pay it off with a cheaper personal loan then you will save money. What you must not do is build up a balance once again; only use the card when you know you can pay off the full statement amount at the end of the month.

Investment

Many analysts are suggesting that investment returns will not be especially impressive in the coming years. A combination of higher interest rates, poor bond yields and higher stock valuations is likely to mean that the historical returns of between 5% and 6% may not be reached. In any event, there is risk involved in seeking high returns. If you pay off your debts, you can see a ‘’visible return’’ equivalent to what you are paying out and that may be approaching double figures.

You can opt for safe investment like Treasury Bonds but the return is not impressive. Indeed, even if your debt is relatively cheap, it may still be a better ‘’investment’’ to pay it off than to invest in search of growth. Where your debt is tax deductible then take the net figure to do your calculations but likewise use the net figure in calculating returns.

Conclusion

In the end, different people will follow different courses of action. The important thing is to take everything into account when managing your finances. You should look to provide for your future of course, but equally if you are weighed down by debt, you will find that difficult so work out a strategy and stick to it.

Tom
 

Arnel Ariate is the webmaster of Money Soldiers.

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