Pay off debt or invest?
QUESTION: EXPERT GIVES SOUND ADVICE
Paying off debt will mean that you have more money to invest in the future.
AMoneyweb reader asked: I currently have R25 000 available to either invest into an FNB share-builder type account or reduce my credit card debt, which is close to R50 000. What would be the better choice given the current state of affairs? I feel shares are depressed and could produce real returns in the future, but I know credit card debt carries a high interest rate. Any advice would be appreciated.
Thulisile Nkomo, who is a private wealth manager at FNB Private Wealth, answered here:
Some things need to be considered before deciding on investing in shares versus paying off your credit card.
Investment in shares
This type of investment is suitable for investors looking for long term capital growth, as it is volatile in nature.
Investing in shares gives you ownership rights; you will get to share the profits and losses of the company, meaning that you will not be immune to the fall of the share price of the companies that you have exposure to.
It is also not wise to invest in shares with the hope that you will make a quick buck to pay off the debts.
Therefore, you need to decide what your investment objective is, as this investment requires long term commitment to achieve long-term capital growth. The current prices of shares look attractive amid the coronavirus pandemic and that creates opportunities for long term investors.
As they say – volatility creates opportunities, which is what we are currently seeing in both the local and global equity market.
Paying off debts
In the past few months, we have seen the South African Reserve Bank reduce the repo rate by 2.5% as a response to the ailing economy. What this does is give opportunities to clients to service their debts.
Paying off your debt will mean that you have money to invest in the future instead of servicing debts. The interest rate won’t stay this low forever, so you should consider taking advantage of the opportunity to pay off the debts that you currently have as fast as you can, making it possible for you to start investing.
Paying off debts will give you peace of mind and you’ll also have more money available every month.
Credit card debt is regarded as bad debt as the interest rate is high, and the repayment of bad debt should be a priority.
Whichever route you decide to go, be sure to explore all potential outcomes. I would recommend speaking to your financial advisor for a plan that best suits your specific requirements.
If you want to invest in shares, you should have a long-term horizon, because in the short term the value fluctuates. Let’s say for example you need money six months down the line, you might find that the value is down, and you may have to crystallise your losses.
If you pay your credit card you will be guaranteed that your debt will be reduced and that will help you to have more money available.
Please note that the above should not be considered as tailored financial advice – it is designed to be broad and thus we cannot be held responsible for any decisions made.
Don’t buy shares and hope you’ll make a quick buck