Content

• Steps
• Tips
• Warnings

Whether it's a mortgage, a consumer loan, a credit card, or both, more and more people are drowning in their debt, and for those with enough income to keep their head above water, the only sensible solution may seem to be to pay off their debts as as soon as possible. But wait - is this really the best financial plan? While debt freedom is indeed a pleasant feeling, in some extremely rare situations it may be better to leave debt (for example, pay off your mortgage in the minimum monthly installments) and invest all of your free cash. Can't decide whether to invest your money or use it to pay off debts? Read on for a few tips to help you make the right decision.

Steps

1. 1 Start budgeting your spending plan. Before you consider investing at all, make sure you actually have free funds. Reserve part of your salary for current debts; debt on loans can damage your credit history, as well as lead to the accumulation of penalty interest, which will quickly block the return on any investment. Pays at least the minimum payments on all of his loans always on time.
2. 2 Create a rainy day fund before investing. Everything may look rosy now, but what if next month you lose your job or you need an urgent amount for treatment? Before you invest or pay off a large loan amount, set aside a small fund just in case. Many experts recommend that such a fund should be a minimum of three-month compulsory expenses. However, this figure may vary depending on your situation and personal preference. This money should be kept in a safe, accessible account, as an option, in a fund of short-term securities, but not in mutual funds (which do not give guarantees of return in a short period of time), or in a deposit account.
3. 3 Consider paying off your debts in terms of investing money. If you repay 3000 rubles of a loan at 13% per annum, then your annual return is 13% Why? Because in this case you will not have to pay extra 390 rubles in the future, which means that you will have 390 rubles more than if you had not paid the debt.
4. 4 Prioritize your loans. Some financial experts recommend first closing loans with a higher interest rate (most often, these are credit cards), and only then closing loans with a lower interest rate (usually mortgage loans). Others suggest listing them in order of volume, from smallest to largest, and paying all the smallest ones first, while paying the rest of the minimum amounts. Then, when small loans are paid off, the amount that went to them is added to the payments of the next largest debt, added to the amount of its minimum payment. This method is called the "Debt Snowball," and it brings a tremendous sense of satisfaction and relief to any multi-loan holder.
5. 5 Compare the annual return on investment with the interest rate paid on your loans. When examining investment opportunities, compare the level of income on them with the level of your debt. Suppose you are trying to decide which is better: pay off your mortgage earlier by adding extra 3000 rubles to your monthly payments, or invest these 3000 rubles every month. If the rate on your car loan is 6%, then you will win if you can invest these 3000 rubles at an interest above 6%. If you plan to accumulate savings at 5%, then it is better for you to contribute this money to pay off the loan.Also ask yourself a question, would you take a new loan now in order to invest at this percentage. If you did not do this, it is better to pay off the debt, and only then invest the funds.
6. 6 Consider the impact of taxes. It is not enough just to deal with the interest that you will receive from the investment or that you need to pay on the loan. You should also find out if your investment income is taxed and the interest on the loan is tax exempt. The tax issue can complicate matters a lot, so if you are not sure you can deal with all relevant tax laws and make the calculations yourself, consider hiring a financial expert. Below, as an example, data from the current US legislation are used.
   • Mortgage loans usually include a tax deduction, so real the interest rate at which you pay is lower than stated. (Please note: you only benefit from the property if you plan to apply for a tax refund. Otherwise, this aspect does not matter to you).
   • Ordinary investments are usually tax deductible, which can significantly reduce the return rate.
   • Deferred income tax investments lower taxable income levels, respectively real return on investment may be higher than stated.
     
     
7. 7 Pay off debt that has a higher interest rate than what you can get from your investment. There is a good chance that you can find a relatively safe way to invest more profitably than the interest rate on your mortgage. However, it is much more difficult to find an opportunity to invest money at a higher interest rate than 21% on a credit card, without a high share of risk. So, having prioritized debt, with a list in front of your eyes, identify all high interest rate debts and pay them off first. Another strategy is to pay off all small loans at once (even if the interest rate on them is low) and free up cash for investments or payments on larger loans.
8. 8 Invest only if the expected rate of return is significantly higher than the interest rate on your loans. In the end, you will pay off all your liabilities with high interest rates and find an acceptable way of investing that will provide you with higher income than payments on loans with low interest rates. Only at this moment there is a real sense to invest funds, and not invest them in overpayment of loan installments.
   • Calculate the risks. Unlike the guaranteed "income" that you will receive by paying off all debts, investments involve a certain amount of risk. Low-risk investments such as interest-bearing savings, deposit accounts and guaranteed government bonds are fairly safe types of investment, but the returns on them are unlikely to exceed the interest rates of even the cheapest loans. A wide variety of other types of investment, including mutual funds and the purchase of shares, maybe bring income higher than interest rates on credit cards, but these incomes are not guaranteed, and, moreover, there is a risk of losing the entire amount on them. In general, the higher the advertised return on investment, the higher the risks. So you should define your own level risk tolerancebefore you invest.
   • Think about your future financial obligations. When you apply for a mortgage or any other type of loan, the level of interest on it (the loan price) will depend mainly on your credit rating.One of the main factors determining the level of a credit rating is the amount of loans you are currently using in relation to the level of payments that you can afford. So, in some cases, you win if you pay off your debts - even if you can earn more from a relatively safe investment - as this will increase your credit rating and allow you to save on future mortgage interest.

Tips

• If you are married, make sure that your spouse or your spouse shares your plan of action. If in doubt, pay off your debts first, and only then look for a compromise solution. Perhaps a more cautious partner will be inclined to invest spare funds after your debt has been reduced to a certain level.
• The same recommendations can be applied to the choice between short-term (15 years) and long-term (30 years) mortgages. Since you receive a lower interest rate for a shorter period, your savings (the difference between full payments in 30 and 15 years) can be perceived as a return on investment in a short-term mortgage. This income increases in proportion to the decrease in the length of stay in an apartment or house. If you sell a house after 2-3 years, you will receive a higher annual income than if you sell a house after 12 years. Some people prefer to take out a long-term mortgage, even if they can afford short-term payments. They often do this in order to be able to invest free funds on a monthly basis. However, this only makes sense if the annual investment income exceeds the annual income from choosing a short-term mortgage AND if only you are actually investing these funds. If you don't have the discipline (and most people don't) to invest regularly, a short-term mortgage will force you to save a certain amount.
• Freedom from debt allows you to pursue more aggressive investment policies and invest more generously in charity.
• There are many calculators available online to help you choose between investing and paying off debt, and between short and long term rentals.
• Investing and paying off loans is not an either / or choice. If you've paid off all of your high interest rate loans and want to start investing while paying off your student loan or mortgage, go ahead! Divide your free funds (or what remains after the end of payments on closed loans) in half and invest one half in investments, and the other half in paying off loan debts.
• Find someone who is eager to get out of all debt and meet with them on a regular basis. Cultivate accountability relationships with people who can help you make big purchase decisions and walk the thorny path of debt relief.
• Please consult a professional. Many economists and financial advisors can help you develop a plan that will enable you to invest in the future while freeing yourself from your current debt.

Warnings

• Most online calculators supposethat everything will be fine with your deposits and will not take into account all possible risks. If your investments do not give the expected result, you may find yourself in a situation where all the energy is spent on paying off debts, while savings are still somewhere near zero.
• Never borrow money for the sole purpose of investing it. Most (if not all) investment schemes do not guarantee a rate of return. All loans will require you to pay interest. It is very easy to get trapped between low interest investments and high debt.
• Investing involves risk and the choice to invest free funds instead of paying off current debts is potentially risky.The level of risk, of course, depends on the investment method, so you should carefully weigh your options. At the same time, remember that postponing payments to a pension fund in order to pay off loans faster is also very risky.
• This article is for general guidance only and cannot replace professional financial or legal advice.