Dehring Bunting and Golding, ContributorMany persons attempt to pay off their debt in the shortest time possible. Is this always the best route to take? If not, what is the best alternative?
Making investments is an option that should always be taken into consideration once there is cash available. Money can be invested to earn interest, and in turn, possibly gain returns that may be used for other purposes by the investor. Therefore, making solid investments can be considered a positive alternative to paying off debt early.
One thing that both debt and investments have in common is that they both incur interest to the investor. However, the interest earned on a debt is an expense, while interest earned on an investment, in most cases, is income.
The two points to note when faced with
investing and making debt payments simultaneously are risk and the rate of return. It is important to ascertain whether the investment will pay off the risk of maintaining the debt. Sound investors should manage their funds to ensure that they are gaining a high level of return as well as minimising the risk of prolonged debt payments.
The amount invested should always be dictated by the interest that can be earned on the investment. If the interest rate on the loan is higher than what you are earning on your investment, the majority of your funds should be fuelled into reducing the debt amount and then placing a smaller amount of the funds into an investment. The interest earned on the investment should be sufficient to pay off the interest accumulated on the loan for the same time period as that which the funds were invested.
Where to Invest Extra Funds
Fixed Income Market
The fixed income market comprises money market securities that provide a return in the form of fixed periodic payments and the eventual return of the principal sum invested once the security reaches maturity. Such instruments include government papers/securities and bonds. Investors are likely to select fixed income securities when they are looking for a constant and secure return on their investment.
The Equities Market
The equities market, on the other hand, involves the trading of stocks of registered companies, and contrary to the fixed income market does not
guarantee returns or the repayment of the principal sum invested. It has often been suggested that investments are best over the long term. Though there are risks involved in this type of investment, it is worth noting that high levels of risks usually correspond with high level of returns.
Consider Investing
Of course it is nice to be debt free, but paying down on your debts, to the point that you have no available funds or investments that are earning significant levels of returns, may not be the best option available. Some investments involve risks, so investors should always ensure that they are informed about the conditions of the instruments in which they are investing. Therefore, once a sound and productive investment is found, the option of investing should always be seriously considered.
To further discuss investing and the many options we have available, contact Dhering Bunting & Golding (DB&G) at info@mydbg.com or toll free at 1-888-CALL DBG.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable.
