Good Investment of Paying Down Debt - Essay Example

There are some chief things that one ought to consider in this decision. To gauge this conclusion as an investment opening, the use of the extra and or available money to make more money later will be discussed. Some of the considerations to keep in mind are risk tolerance, investment options available, and the cash flow situation. Below are some vital points to consider regarding the question ‘is paying down debt usually a good investment?’.

Before considering whether or not to invest, you have to make sure that you have additional money. Have enough backup income to keep all debts current; being behind on your debt expenses can destroy your credit and lead you to suffer fees that will overcome the return on any investment (ROI). At least ensure that you settle your minimum payments on all your debts. This will reduce the incidences where one pays debts and he/she is with time has no money for personal and emergencies (Warren & Amelia, 75).

Things may be looking up now; this is where one takes into consideration the long-term effect. For instance, what will happen if one loses his/her job next month or in the case of a medical emergency? Before one thinks of investing or making larger than necessary payments on your loan, some amount of money should be saved for emergency purposes. Many financial consultants recommend that one saves enough to cater for at least three months of emergency scenarios; the money should be in a safe, accessible account (Warren & Amelia, 105).

This is when one looks at a reduction or full settlement of any given liability as an investment as it provides the first step to the accumulation of assets, and wealth. Accumulated interest rate increases the duration one takes to source wealth; this makes one avoid payment of an unnecessary extra amount of cash annually in the future (Warren & Amelia, 33). For instance, when one makes a $5000 payment on a loan with a 10% interest rate, your annual return is 10%, or $500. This is based on the fact that the extra $ 13 is not paid (Warren & Amelia, 103).

Financial experts advise individuals to debts in a given order from those that charge the highest interest rates to those that charge the lowest. This technique gives a great sense of encouragement and accomplishment to anyone with a high number of arrears to pay off. By doing this, there will be no incidence that an individual will be forced to pay minor debts before settling huge ones (Warren & Amelia, 69).

In determining an investment opportunity, equate its rate of return to the rates of interest on your debts. For instance, if your loan interest rate is 10%, you can get a good return by investing that $100 in any investment that produces a 6% and above return (Elizabeth & Amelia, 41).

Looking at the interest rate that one will receive on investment or pay on the debt is not enough. One also needs to evaluate whether the interest on the investment has tax implications and if the interest on the debt is tax-deductible. Taxes can complicate a good deal unless one a keen look into tax consequences one may end up considering the worst deal hence losing money. Regular investments usually face income taxes, which can hurt the return (Elizabeth & Amelia, 27).

To sum it up, paying down debt is the best investment plan an individual can go for. Paying extra payment on the loan is an excellent investment opportunity. This is because money will be abundant at the finale of the loan repayment period. Paying down debt is dependent on the economical situation an individual has.