Deciding between using an extra $2.5k to pay credit card debt or invest hinges on factors like high interest rates favoring debt repayment, establishing an emergency fund, aligning investments with goals and risk tolerance, and prioritizing financial discipline, with potential tax considerations. Seeking professional advice is advised.
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“I’ve got a credit card on low interest set up with 7.5k in debt (monthly repayments of $150) and about to come into a small boost of money 2.5k. Would you use this to pay down some debt, or best to invest it in some funds on a platform like Kernel and just deal with the monthly payments in the debt?”
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The decision of whether to use your extra $2.5k to pay down your credit card debt or invest it in funds depends on your specific financial situation and goals. Here are some factors to consider:
Interest Rate Consideration: Start by examining the interest rate on your credit card. If the annual interest rate on your card is high, say 15% or more, paying down the debt is often a wise choice. Credit card interest rates are typically much higher than the returns you can expect from most investments. By reducing your outstanding debt, you’re effectively earning a guaranteed return by saving on interest payments. This can lead to significant long-term savings.
Emergency Fund and Financial Security: Before considering investments, ensure you have an emergency fund in place. This fund should cover essential living expenses for a few months. If you don’t have one, allocate a portion of your extra $2.5k to establish this financial safety net. It’s a critical buffer against unexpected expenses, providing peace of mind and preventing you from relying on credit cards in emergencies.
Investment Goals and Risk Tolerance: If you have clear investment goals and a long-term horizon, such as retirement or a down payment on a house, investing in funds can be a viable option. However, investing carries risks, and there are no guarantees of returns. To spread risk, ensure your investments are diversified across different asset classes (stocks, bonds, real estate, etc.). Assess your risk tolerance and comfort with market fluctuations.
Budget and Discipline: Reflect on your financial habits. If you have a history of accumulating credit card debt due to overspending, it’s advisable to prioritise debt repayment. Clearing your credit card balance and maintaining discipline in your spending habits can lead to long-term financial stability. Be mindful of any tax implications related to your investments or debt repayment, and consider consulting a financial advisor for personalised guidance based on your unique circumstances and local tax laws.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
