Have a mortgage on your home, an auto loan on your car and maybe a personal loan on the side? Do you find most of your income draining away in monthly loan installments, and whatever’s left, used up to pay for your day-to-day expenses?
If you’re stuck with debt, growing your money may seem inconceivable especially when the majority of your income goes towards debt repayments and household expenses.
But does that mean you’re stuck in a financial rut? Or is there a way out? Is there a plausible approach to actually investing and growing those dirhams?
Souqalmal.com's Ambareen Musa helps you figure out how to walk the tightrope between debt repayment and growing your wealth.
Compare interest rates on debt with rate of return on investments
Not all debts are created equal – while your home loan interest rate could be around 4 per cent per annum, annual interest rate on a non-salary transfer personal loan could ring at around 14 per cent, and your credit card APR (annual percentage rate) could be as high as 40 per cent. Secured debt is always going to be cheaper than unsecured debt.
Logically, you could earn a better rate of return than your home loan interest rate in investments like stocks, rental property and systematic investment plans. So it would make sense to invest your savings in these instruments instead of prepaying your home loan.
Be sure to take a look at historical returns, tax implications and charges associated with property and investment management to get a more realistic picture of the expected return on investments.
But no investment would ever be able to give you a return to match that hefty interest rate on your credit card. If you’ve racked up credit card debt, it would be best to use your financial resources to pay it all off. When you owe such expensive debt, investing can take a back seat till you’ve paid all of this debt off.
But what if you’re living pay cheque to pay cheque?
If this is your story then you have to figure out a way to either increase your income or cut your expenses so you can save enough money to be able to invest and grow it.
While the obvious way to increase your salary is to ask your employer for a raise or switch over to a better-paying job, you can also boost your earnings by taking on a part-time job or freelance work projects.
To reduce your overheads you must follow a strict budget and make some big and small sacrifices that could involve cutting back on dining out, cancelling under-utilised subscriptions, saving on utilities among many others.
Whatever you do, don’t ignore the ‘emergency fund’
The best-laid plans may come to naught if you’re faced with a financial crisis. So before you think about going all out with settling your debts or investing for your future, focus on setting up an emergency fund.
This fund, which should ideally hold three to six months worth of your living expenses, can bail you out if you’re ever faced with a financial emergency like unexpectedly losing your job, paying for major household repairs or requiring medical treatment that isn’t covered by your health insurance.
While some people may be more motivated by specific financial goals, others may go with the option that gets them the highest estimated payoff.
While you must do the math when deciding between repaying debt and investing, psychology may also play a big role in this decision.
If you’re passionate about getting rid of debt, you may be willing to make bigger sacrifices to become debt-free sooner. Eventually, the final decision is going to be a function of both logic and personal preference.
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