Investors should always learn to maintain the fine balance between investment and debt. Both comprise major chunks of their personal finances and hence investors are often confused as to the weightage to be given to either of these two factors. In case debt repayment is not focused on, there will be a huge interest burden that will take a toll on one’s finances. On the other hand, ignoring periodic investments means that several financial goals will get compromised. In this scenario, one should carefully strategize investments in case there is considerable debt to handle as well.
Confused about investing or repaying debt before investing? You can decide based on various aspects including the rates of interest on your debt. In case the interest rate that exists and is expected on debt is considerably lower in comparison to the returns/interest that are expected from investments, then people should always prepay later and invest first. However, in case the interest rate on the loan is almost the same as or higher than expected returns from your investments, you should use surplus funds to first clear out your outstanding debt and then get into investing.
You should be aware of your overall liquidity. In case you are finding it hard to manage EMIs and other monthly costs, you should definitely use any surplus funds for repaying your debt as much as possible. Maintaining a good credit score is only possible whenever your repay your debt in a timely manner. In case you have additional funds and invest the same, make sure that you analyze whether it can be liquidated in any emergency situation minus any losses of capital. In case the answer is yes, you can consider investing over prepayment of your loan. However, if the answer is doubtful or no, you can avoid the same and prepay debt first.
If you are also planning to apply for another loan for any major purchase in the near future, do not prepay the existing loan with your surplus funds. Instead, use this money to invest in suitable instruments which can generate returns high enough to help you make the future purchase more easily. Try and maintain a good balance between the rewards and risks while choosing what to do. You should also keep your retirement objectives and other financial goals in mind. You should always strive to lower risks linked to the debt that you have by tapping into the rewards that you are expecting through investing surplus funds.