Asked by Anonymous
Asked on 19 Sep 2019
Just cleared my school loan and now I have extra money to use (monthly) from my salary. However, I have a credit card bill to clear as well which I am doing so monthly. Hence, would like to seek advice if I should prioritize in clearing the cc bill or can I concurrently start on some investment?
Top Contributor (Dec)
Yes of course! I will start something too.
Mathematically, it makes sense to clear the credit card debt first. Not many returns that can beat 24% pa on credit card debt.
Psychologically speaking, the starting on the investment part can help you in gaining some time and experience. I won't dwell too much on it, it's compartmentalizing your finances into different "boxes". It helps you to get started.
People who compartmentalized has been known to actually get a better financial well being even though it is not as mathematically sensible.
I will strongly suggest you get started with this, I've seen how many people who tried to clear debt first but didn't have a sense of happiness and a sense of "wasted time".
No point crying over spoilt milk, do some light investment and spend 95% of energy to clear the debt. the 5% in investment will help you in better financial well-being.
PS: The investment should be a small sum just to get started and the difference mathematically won't be a big difference significantly.
Clear the credit card bill first. Most credit card annual interest rates are 24-27%. Which averages about 2% a month.
If you look at it in another way, paying off your credit card debt is also like making annual returns of 24-27%, except you "stop" earning when that debt is paid off.
It's guaranteed returns paying down the credit card, versus non-guaranteed returns on investment.
There are two paths
1) Pay off all debts fully then go into investment (Most Preferred to me)
2) Pay off debts partially and also do investment
You can do a comparison between the interest rate on the credit card debt and the returns on the investment.
Paying off the credit card debt for sure will be "guaranteed" returns whereas going into an investment, you might face the risk of the investment not performing.