What should be your investment strategy when you are in debt?

While managing your personal finance, you may face a dilemma of giving appropriate weightage to either investment or debt since both are important aspects of your personal finance. If you ignore debt repayment, then compounding interest will quickly spiral out and you may easily get into financial distress. If you ignore investment, then you may fail to accomplish many of your financial objectives. So, it is important to maintain the right balance between debt and investment.

Now, when you are already in debt, should you still invest money or wait till your existing debt becomes zero?

To invest or avoid while in debt

Certain important factors like interest rate can help you decide on whether to invest or pay the debt first. If the existing and expected interest rate on debt is substantially lower as compared to the interest or return you expect to earn from an investment, then you should prefer to invest over prepaying. For example, prevailing interest rate on a home loan is around 8.5 percent p.a. and you have earned extra income through annual bonus. You have the option to prepay the loan or to invest the bonus in a balanced fund, which is expected to give a return of 12 percent p.a. (assumed) after tax. In this case you, should continue to pay home loan EMI and use the fund for investing in a balanced fund to earn a better return, considering a risk while investing money in a mutual fund. If the interest rate on loan is close to or higher than the expected return from investment, then use your extra income to first clear the outstanding debt and thereafter use the remaining fund, if any, for investment in appropriate instrument.

Assessment of existing liquidity

Another important factor that you must check before using the income to pay debt or invest is to assess your prevailing liquidity situation. If you find it difficult to manage your regular monthly expenses after paying the EMI, then using the surplus income for repaying such debt could help you to reduce the financial burden.

Repaying the debt on time is very crucial for maintaining a good credit score. If you have surplus fund and you invest it, then do assess whether you will be able to liquidate it at the time of emergency without any capital loss. If yes, then you can think of investing money over prepaying the loan amount. For example, if you face financial emergency, such as job loss or an accident, and you don’t have enough money to repay existing debt EMI, then you can use this investment for emergency cash flow. However, if you are not sure about retaining the value of investing funds and its liquidity factor, then it is better to avoid such investment.

Invest surplus in appropriate instrument

If you are planning to take a loan for other big ticket purchases, then instead of using the surplus income to repay your existing loan, you can use it to invest in appropriate instrument and later on use it to pay for your buying. For example, you are planning to buy a car after three months and you got a surplus income of Rs. 5 lakh. You have an existing home loan with Rs. 20 lakh outstanding and remaining tenure of 15 years, with an interest rate at 8.8 percent per year. Instead of using the surplus income to repay your home loan and taking a car loan to buy a new vehicle, you should invest it in a liquid fund for three months. The invested money can come handy later on for your car buying.

It's important to maintain a balance between risk and reward

To make a correct decision you should focus on maintaining a fine balance between risk and reward while selecting one of the options. You must analyze the impact of your decision on your retirement goal and your other financial objectives. Try to cut down the risk associated with your debt by utilizing the reward you expect to get by investing the fund.

Team WealthyMantra

Source: Moneycontrol

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20 Important Lessons from Rich Dad, Poor Dad

Many people work very hard in their life, few work 10+ hours a day but eventually do not save much and never get rich. Robert Kiyosaki, author of the book explains smart ways to escape this “Rat Race”.

Important Lessons from the Book (Summary):

1.    For most people, their profession is their income and they live through their work to survive. For rich people, assets they maintain, invest is their income.

2.    If, I want to buy something, I must first generate enough cash flow from my assets to cover these expenses. Buy luxuries last, not first.

3.    Excess cash flow generated by my assets should be invested again into other assets.

4.    Do not simply aim for more income, aim for more valuable assets, repeat the circle.

5.    Reduce your expenses low and reduce your liabilities.

6.    Create a corporation to protect your assets and reduce tax expenses. An employee earns, gets taxed, and then spends what is left.

7.    Know a little about a lot. Learn something about accounting, investing, markets, the law, sales, marketing, leadership, writing, speaking, and communication. Know little about everything you can. Also See Bill Gates talking about the same point.

8.    Work to learn, don’t work to earn. Find a job where you can learn one or more of the above mentioned skills. Alibaba’s Jack Ma also emphasized on this particular point here.

9.    Do not simply buy investments. first learn how to invest as no one else can do it better than you.

10.  You become what you study, so choose your study materials carefully and do read a lot.

11.  Every rich person has lost money at some point, but many poor people have never lost a dime. Playing not to lose money means you will never make money. “Winning means being unafraid to lose.

12.  “Failure inspires winners and defeats losers. Do not be afraid of losing and be bold enough to admit and learn from the failure. No one is born perfect.

13.  Be in control over your emotions. Do not let fear or opinions of the general public dictate your actions.

14.  Most sellers ask too much. It is rare that the asking price is lower than something is worth.

15.  Surround yourself with winners. Sit with people who are smarter than you and you can learn from them.

16.  Saying “I can’t afford it” shuts down your brain. Asking “How can I afford it?” opens up your brain.

17.  Pay yourself first. Each month, first invest a certain amount of money into income generating assets before you pay your bills. Short of money, use this pressure to keep yourself on your toes.

18.  Dream big, have a clear game plan in your mind. Always seek answers to important questions such as Why do you want to earn more passive income? For me, because I do not want to work all my life. I want to have control over how I decide to spend my time. Also, I want to support my parents financially because they helped me all my life.

19.  Develop a skill to listen. Listening is more important than talking. Do not constantly argue and think with your mouth. Ask questions, grab as much knowledge as you can from others.

20. On the market: do not follow the crowd, and do not try to time the market. Profits are made when you buy, not when you sell.

Source: Web

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