If you have debt, you're not alone. Since 2008, household non-housing debt is the highest. Should you strive to reduce the use of credit cards, student loans such as PTPTN, and housing loans, or place your money in a retirement savings account or other investments?
The correct answer is: You should do both. Clear Off Debt & Invest. But let's look at the factors first before you decide to pay off debt or invest.
When To Pay Off Debt vs. Invest
In general, the key rule is that you should both pay debts and invest.
Try to consistently contribute to three (3) elements:
Debt payoff
Retirement
Emergency fund
Even if that means you can only contribute RM100 or RM200 of your salary per month to retirement or savings in addition to debt payoff, it's worth doing.
But, a well planned of your salary (after-tax income) should be:
50% on Needs
30% on Wants
20% on Savings
For instance, if your nett salary (after EPF, SOCSO, EIS) is RM4,000
50% on Needs = RM2,000 (RM4,000 x 50%)
30% on Wants = RM1,200 (RM4,000 x 50%)
20% on Savings = RM800 (RM4,000 x 50%)
If you overcommit to investing and only make minimum debt payments, you could wind up paying too much in interest over time. But, if you neglect to invest entirely, however, you may fall short of your retirement goals.
What Factors To Consider
Essential financial goals? Both investing and paying off debt are essential financial goals.
Figuring out how to weigh each goal can be complicated for everyone. Here are a few factors to consider:
Debt Interest Rate
Focus on paying credit card debt first as interest rates on credit cards are so high that you can never get ahead. You must eliminate your credit card debt, and be as disciplined as possible. For instance, use RM500 per month, clear off the RM500.
So, if you are an investor and you have credit card debt, you are likely paying a higher interest rate on your debt than you are earning via your investments.
Some debt interest rates tend to be lower, however, such as with student loans - PTPTN. You don't need to be as aggressive with those as with high-interest debts. You may pay consistently per month and no need to clear off the debt as the interest rate is super low.
Debt Amount
Your credit utilization rate is also important to think about when deciding how aggressively to go after debts. The higher your credit balances, the lower your credit scores. If you don't get your credit use back under control, you'll pay higher interest rates when you need to borrow again.
Improving your credit score can make your life easier when you apply for your next loan or mortgages.
Plan For Retirement
Never abandon retirement savings altogether, even for paying down debt, you should save for the future. If you're nearing retirement age (retirement age is 60 years old in Malaysia) and you're far from your financial target, you might have to work longer, cut spending, or make catch-up contributions even after age 60.
If You Get a Windfall
If you receive a windfall such as an inheritance or a bonus at work, we suggest first shoring up an emergency fund with 6 months' worth of living expenses, as it may take that long to find a new job paying equivalent income to one that's been lost.
If you lost your job, could you survive 6 months without any income?
For modest windfalls, consider dividing your cash between 60% for debt and 40% for investment. We encourage someone who is struggling financially to put enough of the windfall toward debt to get the monthly payment down so that the overall balance can be paid off in months rather than years.
Refinance
If you have the opportunity to refinance at a lower rate, that may impact your decision between paying off debt or investing. This way will reduce your interest rate costs, which reduces your monthly debt payments and allows you to increase your savings rate. This improves your financial world today, as well as in the mid-term and long-term future.
Why You Should Not Stop Investing
The golden rule : Dollars invested early on can have an exponential impact on retirement earnings, due to compound returns and market gains over time. Money will lose value when you only save in the banks, you should invest and make double the income.
Find out more about Invest Real Estate Malaysia platform and how we can contribute to your investment journey today! Best investment awaits you, click the button below to contact us!
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