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Should You Invest Or Pay Off A Debt?

Adhil Shetty

Owing a debt, or overdue debt for that matter, can weigh heavily on both your mind and wallet. With a sudden windfall gain, it is likely that you’re considering the better option between investing and repaying your debt. While investing is a must, should you be doing so at the cost of your financial health? Is repaying owed dues a feasible option or can you gain enough by investing to repay all your debt and have substantial funds at hand? While the ultimate goal is to be debt-free and financially independent, here is all you need to take into consideration when deciding on the better option between the two.

Consider The Gains And The Losses

All debt isn’t the same and the earnings you stand to make on your investments are also subject to the market. So, it wouldn’t be smart to have a blanket answer on what the better option would be for you. Instead, take some time to think of your unique situation. Weigh the pros and cons of each financial choice while factoring in your current income and needs. And don’t be afraid to do some maths! Calculate if you will earn more on your investments right now with the current trend of higher interest offerings? Is repaying your debt going to cost you in prepayment penalties or foreclosure charges? Consider these costs to make the right decision, and take the pulse of the news.

For example, as per the recent 2018 Union Budget, investing in high-yielding returns like that of equity may seem relatively unattractive thanks to the addition of LTCG tax. Do you stand to gain what you think you can despite this tax? Also, consider whether continuing to repay a long-term debt like a home loan will offer you annual tax savings that you may be losing on out when you foreclose the loan. However, if your current loan interest rates are low, now is the right time to prepay. This will help you save a huge chunk on repayment and needless interest payment and you can subsequently channel into investments.

Determine The Risk Involved

This is especially important if you are considering investing in order to gain high returns and repay your debt while also growing your corpus. Examine your investment options so as to measure the guarantee of returns and the income earned after the subtraction of taxes and all other costs. You may also consider the risk involved in borrowing any additional credit, such as a debt consolidation loan, to repay your debts or draining all your resources into repaying your debt along with any additional charges. You may feel like you are gaining mental peace when you don’t see EMIs on your bank statement, but sometimes, it may be riskier to pay off all your debt than to make minimum payments towards it.

Consider Both Investing And Paying Off Debt

One of the most apt solutions for you may be to pay off debt while also investing, if your financial resources permit you to do so. In such cases, you can plan to invest in a high-yielding investment that offers some degree of assurance while also making at least a part-prepayment on your debt. With a reduced loan amount, your interest expense is likely to reduce, taking away some of the weight on your shoulders. Continue to make part pre-payments if possible and consider using the returns from your investments for doing this. While keeping the above pointers in mind, you can tailor-make your own solution to the debt vs. investment dilemma and emerge a winner.