Personal Finance

It’s Christmas season once again. You just heard Jose Mari Chan’s “Christmas in Our Hearts” for the 87th time. You’re considering your plans for the impending holidays. And among a lot of other things, the thing you might be looking forward to the most is the upcoming 13th month pay. That extra money can pay for a lot of things: gifts for the inaanak (when you’re not in the mood to play hide-and-seek), food for Noche Buena, a vacation getaway. This money can also be spent on debt payment.

In fact, it’s wise to pay debt obligations as soon as you can, especially if they have high interest rates. However, there’s also a chance that a good investment opportunity comes along. You might be enamored with high returns from trading stocks or putting your money in mutual funds. It might be tempting to think about forgoing debt payment. When faced with the opportunity to invest, should you go ahead, even when you have debts? Here are four questions you might want to ask yourself when faced with the choice.

What’s your debt anyway?

First of all, you might want to look into what your debt exactly is. And it’s not just about how much it is. Knowing the type of debt you’re in is also important, because it sets the terms of how much your debt will grow over a period of time. Credit card debt and personal loans grow monthly, while home loans grow yearly. Better get the interest rate, as well as applicable fees you might incur for forgoing to pay your debt (and even the fees or rebates involved for paying it early.)

It’s advisable to bring out a calculator, just to see how big your debt will grow in three or five years (since a lot of investments last that long anyway). There are a lot of helpful online calculators that make debt computations easier.

What’s the investment?

Now this is the trickier part, since assessing how your planned investment might fare involves some crystal ball magic. Well not exactly, but you would do well if you weigh all possibilities. And doing so would involve a lot of research, to answer questions like “What type of investment is it,” “Is this legitimate,” “How long will it take before it pays off,” “How much would the return of investment be,” and “What are the risks?” The last two questions are important, since they measure how much money you stand to make from the investment, and how likely is the possibility that you would miss out on your projected earnings.

At what point are you in your life?

This may sound like a philosophical question, but it pays to take into consideration some factors such as your age, your income, and your status in life. Factors such as having a high disposable income, being younger, and having no obligations such as a family to raise would end up helping you become more amenable to an investment. The basic rule is that: the more obligations you have and the lesser your ability and time to make money, the harder it will be to sustain an investment and the safer it is to stick with paying off any debt you may have.

Which route would likely end up being better? 

The basic question here is this: is your projected return of investment greater than the amount of debt you’ll end up having down the line? If no, then you’re better off paying the debt. If yes, then you might want to assess your status in life and think if you have leeway in case the investment doesn’t grow as much as expected. If after all these questions, you still find the two options equal, you might play it two ways: look into a good mix of how much to invest and how much to allocate for debt payment, or follow the option that would make you more satisfied in life.

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