Authored By: Ajit
Panicker
"When you are in debt, why should you invest, there is no need". This is what we say to ourselves when we are in debt, with the loans taken from banks to purchase our own house or cars we buy or consumer durable items we purchase.
Most of us think like this, and this is even logical. Why should you pay unnecessary interests when you are already in debts?
Let us take a situation where a family of four with husband , wife and their two kids stay together. Both husband and wife are working and the children are going to school. They have recently taken a home loan and a car which they purchased three years back. many household items are also financed by various financing companies.
Both husband and wife earn handsomely, but still this kind of debts are still there, the reason being , that they want to live a better life and banks and financial institutions being there to provide such credit facilities.
Now what i think, are they not investing for their retirement or for their children's future, they must be.
What i need to understand is that are they DOING INVESTMENTS while being in DEBT.?
Yes they are, and this is what almost all of us do, barring a few.
In this situation what should be done is , the individual should analyze what is the total debt, which he has taken, and what is the interest he is paying on them. He should at the same time calculate what is the total investments he is making and what would be the interest he would earn over a period of time, he has taken that investment for.
After doing both the calculations, present value of money for all the corpus (from the investments made)which would be created after the tenure should be calculated. Then with the debt he has and the interest he is paying on the assets, or items he has purchased and would be paying till the tenure ends, he should calculate the benefit of assset he is having and the appreciation of the assets which would happen over a period of time.
If there is a positive outcome , in the present value of future money and present outflows, then investments should be made regularly.
But if there is a negative outcome, then still, investments in systematic way should be made so as to maintain the discipline of saving and thus not allowing all the earnings either outflowing as interest to banks or debt repayment or expenses for the household.
"When you are in debt, why should you invest, there is no need". This is what we say to ourselves when we are in debt, with the loans taken from banks to purchase our own house or cars we buy or consumer durable items we purchase.
Most of us think like this, and this is even logical. Why should you pay unnecessary interests when you are already in debts?
Let us take a situation where a family of four with husband , wife and their two kids stay together. Both husband and wife are working and the children are going to school. They have recently taken a home loan and a car which they purchased three years back. many household items are also financed by various financing companies.
Both husband and wife earn handsomely, but still this kind of debts are still there, the reason being , that they want to live a better life and banks and financial institutions being there to provide such credit facilities.
Now what i think, are they not investing for their retirement or for their children's future, they must be.
What i need to understand is that are they DOING INVESTMENTS while being in DEBT.?
Yes they are, and this is what almost all of us do, barring a few.
In this situation what should be done is , the individual should analyze what is the total debt, which he has taken, and what is the interest he is paying on them. He should at the same time calculate what is the total investments he is making and what would be the interest he would earn over a period of time, he has taken that investment for.
After doing both the calculations, present value of money for all the corpus (from the investments made)which would be created after the tenure should be calculated. Then with the debt he has and the interest he is paying on the assets, or items he has purchased and would be paying till the tenure ends, he should calculate the benefit of assset he is having and the appreciation of the assets which would happen over a period of time.
If there is a positive outcome , in the present value of future money and present outflows, then investments should be made regularly.
But if there is a negative outcome, then still, investments in systematic way should be made so as to maintain the discipline of saving and thus not allowing all the earnings either outflowing as interest to banks or debt repayment or expenses for the household.
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