Asked by Anonymous
Asked on 27 Mar 2019
Not sure if I should get rid of my debt first OR start investing. Any advice?
I would think that paying of your student debt would be the top priority.
Because interest works both ways:
Up: When you have positive returns it will compound
Down: when you have debt, your interest of 1-2% will grow as well
Since paying off your student loan is definitely reducing your liabilites, investing on the other hand does not guarantee a return higher than your interest costs on student loans - unless you can find a financial instrument which can guarantee a return of that higher than the interest costs (I believe is about 4.2 - 4.5%), which honestly such financial instrument is almost non-existent - and hence clearing student loan is a surefire way of improving your financial status!
All the best!
P.S: I am currently also agressively clearing my student loan... less than 50% more to go!
Bouncing off the Two answers given, maybe I introduce a Concept shared by many (credits to them).
Which method increases your networth (asset - liabilities).
If your networth increases, you are doing it right. If it decrease, you are doing it wrong.
I think like what guo hao has said, paying off debt is more important, unless you are confident in your ability to be able to efficiently invest in such a way that you will earn a greater rate of return than the interest rate on your debt. Currently the lowest rate right now for student loan debt is 4.5% according to this website https://www.valuechampion.sg/best-education-loan , which means unless you can almost guarantee investment returns above and beyond this I feel it is best to reduce the interest bearing liabilities you are carrying as soon as possible whilst you have the ability to do so. You may never know when an unforseen event may happen, and the liability will just be rolling against you year on year.
After all, you are investing with a goal in mind, unless you are investing to pay off your debt, then it is much better to use it to pay it off straight away in my opinion. Gets a load off your shoulders as well knowing you owe less and less money!
I personally think that paying off student loan should be your priority even if your student loan may have very low interest rates.
By payiing off your student loan, you will be able to free youself up by pursuinf other major goals. Such goals include buying your house, wedding etc and even investing!
Also, if you currently have the financial resources to be able to do so, it will be best if you pay off your student loan. This way, you will also be able to have one thing off your mind after paying off your loan.
hope this helps!
Short answer. It depends, you have to look at it at a broader perspective and decide if either option is aligned to your short term goals, or else you will find yourself in a shity situation where you need money and have to pull out your investments to finance a short-term goal that could be catered for with proper planning.