19 Apr Invest or Payoff Debts
I have been struggling on this statement too. Whether to invest or should I pay off my debts. It gets even more complicated if you are “over exposed” when different guru/author giving you different advice depending who you want to listen. Some will tell you if you have positive cash flow you are good to go and replicate it. We need to use leverage OPM (Other People’s Money) to be successful. Some will tell you debts is not an issue if ….. So which should you listen to.
To start of with, my intend of this post is not to discuss those straight forward scenario. My definition of straight forward scenario: Putting your money in FD instead of paying off your credit card. Those are common sense you need to pay of your debts as the interest is much higher instead of invest. It gets more tricky when it comes to, should you invest in REITs(relative save investment generating 5-6%) or should I pay off my home mortgage which is 3-4%. Like I said, dependent on which author/guru makes more sense to you I suppose that is the advice you should listen. My take “I should pay off my debts FIRST before I start investing”. Will give more points why I made such decision.
We, human are very mathematically and logical in nature if you agree with me. We will try to mathematical access things where we compare which gives us a better return and we go for the option. Unfortunately I beg to defer and those are the 5 points that I can come into conclusion why we should forego to investment but switching the focus to pay off our debts first:
1) Look at the complete picture.
You are partly right that putting money into an investment that generates a higher return seems like a wiser move. However, you will need to look at the risk picture also. For example, does a risky investment that gives a higher return means it’s a good product compared to a lower risk one. Certainly no. We cannot apple to apple. Same goes to our argument today. Having debt is risky but not having debt is not risky. Do you agree?
2) Investments are not guaranteed
Regardless how you want to argue about your investment, investment are never guaranteed. I understand the unit trust person selling to you might say this is an uptrend trust etc etc etc, but what I can tell you these are never guaranteed. No one is able to foresee what will the market will be and hence not able to guarantee your returns too. Worst case, if once you enter the market and there is a correction happen and you will need to wait for it to bounce back. On the other hand, what is guaranteed is your repayment of loan as well as the interest. You surely know the bank will come after you at the end of the month for the repayments and interest will be computed and that is guaranteed.
3) You can lose money in investment
Similar to item 2, nothing is guaranteed in the investment world regardless what. In cases, you can loose money too in investment. On the other hand, if you pay off your debt, you certainly save up the interest that you need to pay
4) Investment is for long term
You can only see return in you are investing after a long period of time. By the way, I’m talking about investment and not gambling. Your might not see anything in the next day or so. However, if you pay off your debts, your principal or interest is certainly deducted on a monthly basis,
5) The secure feeling
I guess this is just me. Have tried attended a couple of property workshop but still it failed to convince me. 1 of the strategy that always been taught is purchasing positive cash flow property and multiply them by purchasing more. Again, mathematically that works but I still have in the insecurity feeling. What happens if my house is vacant and I have a mountain of debts to pay every month. I would rather have 1 or 2 property fully paid off knowing that even if it is vacant the damage will not be as high.
Just to reiterate I’m not asking you to sit on a pile of cash and do not invest. If the question is to invest or not to invest. My answer to that is certainly invest. But, after you have cleared your debts which can make your investment even more fruitful. There was a saying having debts is like you are trying to run with shackles on your leg. Remove those shackles first and I’m sure you can complete your marathon much easier with lesser risk.