Widely read:
Say, you get a bonus or a pay hike. You have an extra sum of money with you. If you don't have any debt to pay off, the choice is simple. But if you have some debt, you may wonder whether to use this money to pay off the debt or to invest it to build a portfolio.Mint explains how to choose between the two options.
Interest rate
When you are looking to invest, check the post-tax returns to begin with. Next, compare the interest rate that you are currently paying on your loan. If you have a credit card bill outstanding and the annual interest rate on it is 19%, unless your investment gives 19% post-tax return, you should pay off the card dues. Close that loan first which has the highest interest rate.
Reduce debt: good
Invest: bad
Product
Loans can be classified into two kinds-good and bad loans. Good loans are those that help you buy things that are a necessity. For instance, mortgage loans are considered good if you are buying the house to live in it. Bad loans are those that are used for lifestyle expenses such as a personal loan to buy a gadget, or credit card outstanding. Bad loans need to be paid off first.
Reduce debt: good
Invest: bad
Liquidity
At every stage of your life, you have a goal. It could be as small as joining a marathon club or taking a trip to something as big as a child's education and your retirement. Not having enough funds can affect both the short-term and long-term goals. Hence, at all times, you need to have some investments. One must also have an emergency fund in place to cope with emergencies.
Reduce debt: bad
Invest: good
Credit score
If you are servicing many loans, besides the financial implications, it also affects your credit score, which can impact your future borrowings. Your credit profile can depend on the type of loans you take. Avoid taking too many unsecured loans as lenders see this as a red flag. If you miss making a payment, the credit score is affected, and it takes around 9 months to improve it.
Reduce debt: good
Invest: bad
In arrangement with HT Syndication | MINT
New episodes every Friday
