To me, the decision to invest or to pay off debt has never been about the amount of money I could save, or the often-referred to ‘guaranteed returns’ on paying off debt.
I have always been clear, so long as I was intentional about the decisions I made, investing would always be the default decision for any extra money I stumbled across. No excel sheets required for this one.
The narrative that paying off your debt faster would save you x amount of money, has never made sense because once you finished paying off the debt, you cannot put your hands in your pocket and find the money you supposedly saved. You would have a base of R0 to start investing from. Yes, you will end up paying less in total repayments including fees and interest, but that would be the cost of losing out compounding potential from investing. The pertinent question would be “is the trade-off worth it?”
With investing, the money would have gone through the compounding process, and you would be starting off a higher base than if you had waited to pay off debt.
Having said that, there are exceptions. The only time I would prefer to pay debt off quicker and pause investing is if:
The debt was created as a result of unforeseen circumstances
I make the conclusion that the debt was a stupid mistake, and having it makes me angry
I came across information that would have impacted the decision upfront, had it been known
A bond on a house and the purchase of a vehicle on instalment sale are highly unlikely to be debts I would in a hurry to finish paying, as the interest charged on them are reasonable, and both are items that can be viewed as ‘assets’ in the production process. If done right and maximised, both are positions of leverage. But that is the topic for another day.
What is your stance? Do you choose to pay debt off faster, or to invest? And why?
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