Wednesday, September 20, 2006

Invest Or Pay Your Debt?

Invest or Pay Your Debt First?

OK, recently I received an email from one of my blog's readers asking me how to start an investment as soon as possible. Yes, you are quite right, I was having the same dilemma as you years back and I am still having the same dilemma right now, 'Should I pay my debt first or use my saving to start my first investment?'


Frankly speaking, I must admit that I am not an expert and certainly I am not a millionaire. I am just an ordinary people starting to learn what investment is. I certainly hope my readers can share their experience with me in this blog.

I always look at these factors before I put my money in any investment,

First Factor - I already have enough money in my emergency fund to pay all my commitment should I loss my job and I have no income for 6 month.

Second Factor- I look at all my debts and see how high the interest is.

Third Factor- I calculate the risk of my investment- high, medium or low and whether my projected return is higher than my debt's interest.

OK, let's me illustrate an example, Mr A has US15k in bank which gives him an interest of 5.0% per annum. He has US10k kept in his saving for emergency fund. He has unsettled college debt of US20k and he has to pay an interest of about 4.5% per year and credit card debt of US10k which has an interest rate of about 18% per annum.

He is keen to use his money (US15 grand) to invest (of course, the first rule of the game in investment, NEVER use your emergency fund for investment, he should keep his US10K in bank and use them only during emergency), however, where should he put his money- stock market, mutual fund, property.........etc?

It is easy to calculate your risk, you must make sure that can you get a better return from your investment as compared to your debt's interest before you even start talking about investment. You notice that MR A has a credit card debt of US10K which the bank charges his 18% of interest per annum. If Mr A can find an investment vehicle that pay him a return better than 18% per annum ( which is unlikely!), then he can invest his extra money into that investment, or else I advise you to pay your debt first!!

Investment only starts when you have extra money. Clear your debt with high interest and only think about investment!

I would talk about stock market in my next lesson. Say tuned!

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