Is it better to invest or pay debt with surplus money?

Below we outline some of the considerations you should consider before making the decision of whether to invest in shares or pay off your credit card debt with your surplus cash.

Thuli Nkomo CFP®

Thuli Nkomo CFP®

Private Wealth Manager

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Is it better to invest or pay debt with surplus money?

Reader Question: I currently have R 25 000 available to either invest into an FNB share-builder type account or reduce my credit card debt which is close to R50 000. What would be the better choice given the current state of affairs? I feel shares are depressed and could produce real returns in the future, but I know credit card debt carries a high interest rate. Any advice would be appreciated.

Investment in shares

It is not wise to invest in shares with the hope that you will make a quick buck. Share investing is most suitable for investors looking for long-term capital growth. I say long-term because shares can be volatile, especially in the short term, and taking a long-term view can be helpful in smoothing out this volatility. Remember that investing in shares gives you ownership rights; you will get to share the profits and losses of the company, meaning that you will gain from share price appreciation but not be immune when it falls.

Current shares do look attractive given how heavily they have sold off on the back of the coronavirus pandemic. This can create opportunities for long-term investors to buy at these depressed prices in the hope that they will rise in value over time. Like they say – volatility creates opportunity, which is what we are currently seeing in both the local and global stock market, but you must consider whether such an investment fits with your risk profile and overall investment objectives.

Paying off debts

In the past two months we have seen the South African Reserve Bank reduce the repo rate by 2% as a response to the ailing economy. This means that the interest rate on your credit card will have come down; it’s a good idea to take advantage of this and pay off your debts as fast as you can.

Paying off the debt will mean that you will have money to invest in the future instead of servicing debts. It’ll also give you peace of mind.

Our advice is to prioritise getting yourself out of debt. Paying off your credit card means you are guaranteed to reduce your debt; investing in the stock market can’t deliver such guarantees because share prices can go up as well as down.

Once you’ve paid down your credit card, you can then consider putting any surplus money into the stock market, as long as you have a long enough time horizon and are happy with the level of risk such an investment represents.

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