Debt and Investing

If you have a car loan, a student loan, a mortgage, credit cards or medical bills, you probably have beaten your brain out in trying to find the best answer to one of the most difficult financial problems of investing and paying off debt. You probably have spent some sleepless nights pondering the question: should I pay off debt quickly and then invest later or should I invest now and pay my debt slowly?

Following the textbook approach to this problem, the answer is pretty simple - if the return on investment (ROI) that you expect is higher than your debt, put your money in a profitable investment scheme. Doing so will not only help you pay your debt, but also earn you money in the long run.

However, for most individuals and businesses, this neat academic formula is not always the best solution to the problem. This is because there are variables or factors that should be taken into consideration when making the decision of prioritising investment or paying off debt first. And two of the most important factors to consider are the interest rate on debt and the rate of return on investment after tax.

For example, if the debts you are dealing with have high interest rates, and the possible return on the investment that you will make is not enough to cover your repayment and the interest rate expense on your debt, then you should pay off your balance. Otherwise, you should consider investing. The most important thing to remember here is that you should always do what is best for your bottom line.