Should I invest or pay my credit card debt?

Should I invest or pay my credit card debt?

By Sunshine Santiago
Do you suddenly find yourself having extra cash after a few months’ worth of saving? And now, your next question is: should I invest this extra money or should I just use it to pay my credit card debt?
Some financial advisors will tell you to just continue paying the minimum charge for your credit card. That way, you can save your extra money for your retirement or for a big event or a big purchase that you are planning. On the other hand, some finance experts think that it is better if you just pay off your credit card debt first that way you have less to worry about. Below are some points to consider in making the decision:

1.      Do you have money set aside for your emergency fund?

Making an investment and completing your credit card payments requires extra cash that you will not use for your daily expenses.  But other than this, ask yourself if you have already set aside an emergency fund you can turn to for accidents, illnesses, house and gadget repairs, and other miscellaneous fees.  If your answer is no, then try saving up money that is enough to tide you over for three to six months. Make saving a habit so that you have enough saved for an emergency fund. When you have set aside an emergency fund, then it’s the only time that you can start to plan on any investments.

2.      Consider debt payments as investments.

Debt payments you make usually decrease the amount of loan payments you have to make in the future. Therefore, it enables you to have more money when your debt is completely settled. You may compare credit card debt payments to a bond or a certificate of deposit (CD) which can provide you with fixed rate cash at certain dates in the future.

3.      Decide on which debt you want to prioritise and stick to that plan.

Unpaid high interest rates can lead to credit card problems. Most financial advisors will probably tell you to choose to pay debts that have higher interest rates first before you consider getting other investments.  Similarly, you can also weigh out the return rates of the investment you’re planning to make against the interest rate of not paying your credit card debts on time.  You should be able to figure out the importance of setting the high interest debts you currently have.  Alternatively, you can also opt to settle small debts first so that you will have cash later on that you can use to pay for your bigger debts. Whatever you decide, choose what you think is easier and more convenient for you to do.

4.      Include taxes in your computation.

In deciding whether to invest or to pay off debts, you don’t need to just compare and compute the interest rates of a potential investment project against the interest rates of the debt you will be incurring.  Don’t forget to include tax in your computations and try to ask help from a reliable finance person when you want to know whether your payments will be tax-deductible and whether the interest rate you will gain on your investment is taxable. By considering the tax implications, you will have a clearer picture on the returns of your investment as opposed to paying off all your credit card settlements.
As a conclusion, it is advisable to completely settle your high interest credit card debt and learn about proper debt management and saving before you think about investing your extra cash on other projects. You will be able to focus more on investing when you have peace of mind that comes from being debt-free from your credit card obligations.

Sunshine writes  for CompareHero.my, the most comprehensive financial comparison service in Malaysia.  Compare credit cards, broadband plan, and others at a competitive price.