Debt Pay-off or New Investment? Choose Wisely

When faced with the dilemma between this and that, most people buck under pressure. Options tend to confuse people and the more the options, there seems to be an excess of confusion. When it comes to handling finances, the confusion increases to manifold. However, investors can make an informed decision by thoroughly researching their options, evaluating their risk appetite and financial goals to attain benefits from their investments. In case of a stuck over between pay off debt or invest the money, go through this article to make a wise financial decision.

What should you do with Rs 20 lakh in hand? If you pay-off your debts and reduce the credit mongers, you will be free from the never ending saga of debt but on the other hand if you do not leverage, you may not be able to save enough in financial assets to retire peacefully. If you are at loggerheads in a situation like this we advise you to consider your best investment options, risk tolerance and cash flow situation before making any decision.

Investment Options

It is important for you to understand that your decisions on investment are supposed to be based on the numbers you have with you and a thorough consideration into your after-tax cost of borrowing versus your after-tax return on investing.

If you are holding a diversified portfolio of investments which includes equities as well as fixed income then you need to check through your after-tax return on money invested and after-tax cost of debt. In an ideal situation your after-tax return on money invested is higher than the after-tax cost of debt.

For example, if you have a loan under your name at an interest rate that is lower than what you have invested in securities than the option to invest your money in assets is a better option. If you're an entrepreneur, than the most apt thing for you in such a situation is to invest your money in business rather than reducing your debt. While if you are nearing your age of retirement than investing in risk portfolio should be avoided and paying off the debts should be a far secure option.

Risk Tolerance

While evaluating the investment options itself, you might have noticed the need for checking on the few criterions before going forward with any decision. Your age, income, earning power and tax liabilities are the foremost priority that you should check on, apart from that your familial responsibilities, health costs, or any criteria unique to you should consider them.

You can choose to keep your liquid income as fixed income investments, investing only excess cash in equities or on financial assets.

As an investor you need to be prepared to take few risks. If you do not have an appetite for risk and are afraid of losing the money than you would be better off using your excess cash flow to pay down your debts. However, this situation has a downside to it. In case of losing your steady flow of income you will find yourself still making regular mortgage payments with meagre cash to use.

Cash and Debt

Before you begin investing or reducing debt, we advise you to have adequate liquid cash with you to handle any emergency at hand.

Credit card bills and should be paid off at the earliest as the interest rate on these is higher than what most investments will earn before taxes. Paying them at the earliest would ensure you save on the amount you pay in interest.

The Bottom Line

Paying off your debts or investing your money depends entirely on your financial situation. To save yourself from sleepless nights over debt, keep your financial goals reasonable, your head straight to keep on evaluating your investment options, risk tolerance and cash flow.