Wow! This is a million-dollar question depending on the amount of loan one has. This question had popped in my mind more than once. Investment vs Loan. I want to evaluate where I am going to lose more money. Investing is going to put money in my pocket. But I don’t want the loan EMI to wipe all out. So, should I pay up loan first or invest?
Let’s take a look in detail and decide with logic. I will take my case as an example. I haven’t taken any high-interest loans. The personal loans that I have taken is charged at 10% interest. Whereas the investments that I am making will give me an average return of 12% interest. My loans are for 5yrs. So whenever I get some lumpsum amount it doesn’t make sense for me to put that money into the loan. Granted that my loan will get closed faster but I am missing on that extra 2% return that I will get if I invest.
So here is what I will do in the above scenario. I will pay EMI regularly for the next 5yrs to complete my loan. And whenever I get huge amounts as a bonus from work or gift I will invest that money into the stock market. This is particularly good if you have a home loan. Home loans charge very low interest and also has tax benefits. So do not close loans which give tax benefit with a low interest.
But this scenario changes totally if you have high debt loans. I have a credit card loan and they charge me 18% interest. In this case, it doesn’t make sense to keep making investment vs loan. That extra 6% of interest (18%-12%) is going to take money from my savings. I am paying this loan very soon. Banks earn through the interest charged, the penalty from maintaining a low balance and giving loans.
These were my logical approach to deciding where I have to put my money. This could be different for you. If the debts don’t let you sleep then clear that out first. But to become financially independent and retire early I made an informed choice. And I thought I should share that will all of you. The calculation and its choices were so simple. But since we think making financial decisions is complicated we often overlook the simple steps. Remember a financial solution should always be simple otherwise the solution is not right for you.