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Why, you may ask, is repaying debt shown as a possible alternative investment?
Quite simply, the interest that you pay on debt is likely to be at least 3% higher than the amount that you may earn on deposit. Additionally, the interest that you earn on deposit is likely to be taxable, reducing the investment return further.
So by paying off your debts you are likely to be better off compared to keeping money safely invested, but there may be reasons why you want to invest instead of repaying your debts:
- You should always keep an emergency reserve fund. When an unexpected expense arises,
you may not wish to wait until a lender makes a decision whether to lend. Additionally,
the need for emergency funding may come at a time when it would be difficult for
you to borrow. So you keep control by having savings available.
- You may be prepared to take risk with your investment, in the hope of large gains over the medium to long term. Remember, though, that the after-tax investment return needs to beat the interest rate that you pay on your debts, if you are to be better off. And remember also that the values of investments that carry risk can fall as well as rise.
When thinking about investing, always consider paying off your debts.
For help in planning your finances, contact us.
