Savings vs Reducing debt

There always is a question in people's mind as to what should be priority-- Saving and investing or Reducing any outstanding debt that a person may have. This is an important question that all of us as we start to discover debt really have.

One can have multiple debts that we could have taken
1. Personal loan
2. Home loan
3. Credit Card loan
4. Loan from a relative

and usually most of these have some sort of a repayment plan. So the question always arises is that should we look to prepay the loan or keep saving in mutual funds etc

The way to answer this is by asking yourself two questions.

1. What is the term of the loan--- eg Personal loan can  be for a couple of yrs and a home loan is usually > 10 yrs.
2. What is the interest rate that you are paying on the loan


So you need to weigh in your answers to the following rules.

1. Pre- Pay off the loans with the lower tenure
2. Pay off the the loan if the post tax return on investment < Interest rate on your loan


so when you use the above rules , it will become clear as to what you should be doing-- pre pay or invest.

There is one exception to the rule-- CREDIT CARD DEBT.... Pay that off immediately because

• The rate of interest is extremely high ( high 30%)
• An outstanding here will have an impact on your credit history and hence you may not be able to get some homeloans ( Yes-- this has started happening in India ever since banks have started sharing default lists)

So , simple aint it... some basic rules and only one exception.. :)

Happy Investing