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The spectre of debt

People who are carrying loans should prioritise loan repayment over making investments--and there are very few exceptions to this

The spectre of debt

There is no financial term about which are more quotable quotes than debt. There are funny ones like "Today, there are three kinds of people: the have's, the have-not's, and the have-not-paid-for-what-they-have's", and proverbial one like "The rich rules over the poor, and the borrower becomes the lender's slave", and Shakespeare's "Neither a borrower nor a lender be; for loan doth oft lose both itself and friend."

No one has ever said a kind word about being in debt. Debt is the biggest single source of financial problems for individuals (for businesses too, but that's a separate story). Debt is worse than not saving anything because it is equivalent to negative savings. I think that's a key phrase in the impact that debt has on people's financial wellbeing--negative savings.

What makes it surprising is that an extraordinary number of people--in increasing numbers and with young people prominently among them--are starting to make investment while they are still in debt. In many cases, this is credit card debt. Does this make sense? No, it doesn't. There is practically no investment that can be relied upon to generate more returns than the interest that is being paid on loans. Almost without exception, if you have any debt, do not invest. Get rid of the debt first. There are even retirees who are buying things on EMI.

The Wall Street Journal once published an article on whether money could buy happiness which found studies showing how higher debt was related to higher stress and higher domestic discord. They may be confusing cause and effect, but there's no doubt that debt should be cleared if there is any spare money.

Of course, all this is based on a comparison of incoming and outgoing interest rates. The one exception often turns out to be a housing loan on a first house which one is going to live in. After you calculate the real effective interest rate after taking into account tax breaks and rent, the loan turns out be a good one to carry. In every other case, pay off your loans before you think of investments.