Should you make an investment when in debt?
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Should you make an investment when in debt?

  • Highlights

  • Compare the rates of interest on debt and investment

  • Ensure the chosen investment is secure and liquid

  • Liquidate diminishing investments and focus on clearing your debt first

  • Choose basis your financial position

Deciding whether you should make an investment when you already have debt to repay, can be tricky. Although, this may seem to be tempting, you must evaluate whether or not it is the right decision for you. Consider the following 4 factors to arrive at a decision that is best for your financial situation.

1. Calculate the total gain

Start by evaluating what you stand to gain. If you find that the rate of interest offered by the investment is much higher than that of the debt, it makes sense to invest. On the other hand, if the interest rate of your debt is higher, clear it first before you make any investments.

2. Make sure the investment offers high liquidity and security

It is important to remember that investments are not risk-free and should you make a loss, you will have to have the finances to cover it, as well as to repay the debt. So, check the risk factor that the investment carries before you decide. Also check whether or not the investment is liquid. If it is, you will be able to use it to repay the debt. But, if it isn’t, you will end up locking your funds away and be left with debt to take care of using limited funds.

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3. Terminate diminishing investments

While you may not always earn high returns on your investments due to fluctuating market forces, if you choose to make an investment while tackling debt, it is essential that you monitor your investment closely. If the rate of return on your investment is diminishing steadily, it is better to terminate the investment as soon as possible. By holding out you are likely to incur higher losses and hurt your credit score too. In this scenario, it is always better to play it safe.

4. Choose basis your income

Basis your financial standing, if you are worried about not being able to repay your debt, focus on clearing it first, before you decide to make an investment. However, if you feel like you have the financial backing to take care of things in the eventuality that your investment doesn’t yield ideal results, you can invest for future growth and tackle repayment of your existing debt simultaneously.

By reviewing your goals and your financial standing, use these tips to make a decision regarding whether you should focus on clearing debt only or engage in building wealth simultaneously.

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