Should you repay debt or invest

Repay DebtOff lately I have been sharing a lot of stories with you through the articles I write. But let me tell you what I write are not just stories but real life things that I keep hearing when I talk to people around. This week also I am going to tell you a story about a friend who’s also my client and how he learnt what managing money is all about.

He is a 26 yr. old guy who’s an engineer and I happened to meet him for some technical help for my business. So when I was explaining him about my financial advisory business, I asked him what’s investing to you? He replied “If you can make my Rs.200 into Rs.2000, then only I’ll invest; else my life is great and why should I bother investing or saving”. He was no different than the young people we meet today. Well the story does not end here. Over the months of continuous interaction I came to know that this guy had a huge credit card debt though that debt belonged to his business which was inoperative now but he was still carrying it. So I asked him how are you paying off this debt? He said he was paying it in small instalments (which was not even 2% of his entire debt) every month.

I asked him why are you doing so and why are you only paying such small amounts every month. He said I am not left with enough money at the month end and I will pay this gradually. And how does it matter? Unfortunately that guy did not even know that delaying the credit card payments is attracting him huge interest and he’s falling in the debt trap.

Where was his money going?

Now the question is what he was doing that he was not able to save money to pay for his debt. Apart from paying for his needs and wants, he was investing regularly through Recurring Deposits. What’s important to note here is that on one side he was paying huge interest (24% p.a. approx.) on his loan and on the other hand he was investing money which could have been otherwise used to pay off the loan. Do you think this was a good idea? Well I often face this question that “Should I repay my debt or invest”. The answer is “It depends”.

What should he do next?

Long back I wrote an article on good loan and bad loan and quoted that debt may not be necessarily bad always. So I went on to explain him that if you have a debt which is a good one such as home loan for buying your own house or a car loan (for your use), continue paying for it and save simultaneously. But if you a bad debt like credit cards or personal loans or home loan just for investments purposes, then please get rid of them asap as they are eating you every day and making you live on the edge.

Every month he tried to save as much as he could and used this money to pay off his personal loan. And today he’s debt free.

Remember if it’s a bad debt use every penny that you can, to pay for it. But if it’s a good one then don’t postpone your savings just for the sake of getting debt free. Sometimes debt can also be good.