For some, the prospect of dealing with monthly instalments for an elaborate period of time may seem contradictory to financial freedom. For others, not having value investments may be a matter of concern. Whatever your priority, your decision whether to consider growing your money while in debt should be based on one vital detail – long-term financial security.
With majority of your income going towards settling debts and meeting everyday expenses, we help you figure out ways to add value to your financial worth in the process.
Do Your Calculations
Some simple equations can help you decide the best course of action. The rate of interest at which you acquire a loan should be less than the rate at which you earn from your investments.
When dealing with cheaper loans like home loans, offered at around 4 percent per annum, it makes better sense to continue the mortgage and invest in areas like stocks, property and systematic investment plans. In such a case, debt is the cheaper option.
For expensive loan instruments like credit cards, issued in the UAE at around 40 percent APR, debt can accumulate at a rapid pace. As such, it is more practicable to settle these debts before you consider investing.
Don’t Have a Dirham to Spare?
If money is always tight, look for ways to supplement your income. You can work towards a raise or a promotion, do overtime, switch jobs, start a side business, get freelance work or a second job.
Additionally, you should try to cut back on discretionary expenses. Small expenses add up. Dining out less, saving on entertainment and cancelling under-utilized subscriptions, for example, could mean hundreds of extra dirhams in your bank account at the end of the year.
More savings equal more leverage when it comes to investing or debt settlement.
Be Prepared for a Rainy Day
An emergency fund is an essential part of your overall risk management. Before you even start thinking about settling debts or saving for investments, make an effort to set up an emergency fund.
As a part of your financial strategy, an emergency fund provides buffer against crises such as job loss, major household or car repairs and medical treatment not covered by health insurance. The consensus on an emergency fund is three to six months’ worth of living expenses.
There can be a constant battle between emotion and intellect when deciding which option is better. You may either be motivated by financial freedom or better long-term payoff. Ultimately, what works best is balancing your instinct with good financial knowledge so you can make an informed decision.