Investing is an important part of long-term wealth creation, but if you have outstanding loans or credit card dues, you may need to rethink where your money should go first. When the interest you pay on debt is higher than the returns you could earn on investments, clearing your dues may be the more financially sensible choice.
The decision, however, depends on the type of debt you have, its interest rate, your financial stability and how soon you need the money.
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When Should You Prioritise Paying Off Debt?
High-interest debt, particularly credit card dues and expensive personal loans, should generally be a priority. The interest on such borrowings can quickly add to your financial burden, while investment returns are neither fixed nor guaranteed.
Start by listing all your outstanding debts and their interest rates. If you have multiple borrowings, focus on paying off the debt with the highest interest rate first while continuing to make the minimum required payments on the others. This approach can help reduce the total interest you pay over time.
Do not use all your available cash to repay loans. Maintain an emergency fund to cover unexpected expenses, such as medical bills or a temporary loss of income. Without this safety net, you may have to borrow again when an emergency arises.
Check whether your loan carries foreclosure or prepayment charges before making a large repayment.
When Does Investing Alongside Debt Repayment Make Sense?
Not all debt needs to be cleared before you begin investing. If your loan has a manageable interest rate, your repayments are affordable and you have sufficient emergency savings, you may be able to do both.
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For instance, someone repaying a home loan at a relatively moderate interest rate may choose to continue investing through a systematic investment plan (SIP) while making regular loan payments. This can help maintain progress towards long-term financial goals, particularly when the investment horizon is several years away.
Your financial goals also matter. Money required in the next few years may need to be kept in relatively stable and accessible investments, while long-term goals may allow greater exposure to market-linked assets, depending on your risk tolerance.
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