Should you clear off your debt early or invest money for higher returns?

People often feel guilty to invest when they have a debt to pay off. But should people avoid investing for the future just because they are in a debt? It can be any debt, a credit card, a home loan or a student loan. One can always decide which debt to pay off, when and how.

The decision, however, lies on one thing. The interest rate. If the return from the investment is higher than the interest rate on the loan, then invest, else pay off the debt. Debt repayment and investments can go on simultaneously without any interruption. Usually, it is advised to follow a particular order while paying off debt and investments. Read on to know which debt to pay off first and which financial goal can be given the first priority before paying off debt.

Credit card loans

Credit card debts are the costliest. They come with an interest rate of 36-48% per annum. It would be a very wise decision to pay this debt off first. If not the interest payments keep piling up and will only increase a person’s financial burden. One can always convert their credit card debt to monthly EMI’s. The interest rate usually comes down by a percent or two. Paying an interest which is even 1% less can save hundreds for a person. This can, in turn, be used to invest.

Emergency fund

Building an emergency fund comes next after clearing the credit card debt. One can have other debts in hand but one should be covered for emergencies. Have an emergency fund is more of a necessity. One needs to have at least 6 months of expenses plus the cost of their last emergency in their emergency fund. This fund can be kept in cash or a bank or can be invested in a liquid fund.

Invest for retirement

Next on one’s list should be to cover for retirement. Retirement is a far off goal and investing a small amount towards it regularly for a long term can help accumulate a larger amount. One can invest in mutual funds through SIP for their retirement. SIP and long term investing is a successful combination of wealth creation.

Student and home loans and Investing for other goals

These can go on simultaneously. Student loans, home loans or any other loans do have a schedule of repayment. Stick to the schedule and make timely payments. There is no hurry to pay off these loans as the interest rate for these debts are lower than the returns from investments. Mutual funds historically gave 15-18% annualized return. The home loan interests are definitely lesser than this. One can follow the rule of the 50/30/20 rule for managing money. Where 50% of the income goes for needs, 30% goes for wants and 20% goes for savings and investments. The investments for other goals like a vacation or buying a car or children’s education can be used from this 20%.

Investing for a secured financial future should be taking the center stage instead of paying off debt. One should start investing if they haven’t already. There is no need to feel guilty to have a financial future even with debts in picture. It’s not wrong to invest a small amount of money regularly in mutual funds to create a bigger corpus.

Happy Investing!