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Debt or Invest- Is there really a choice?

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One of the biggest investing headaches is to decide whether you want to pay off your debts first or use part of your salary to invest for your retirement.

There is a lot of information out there on the internet. Some of it just doesn't sound at all right, like this article "The No Brainer: Pay Off Debt or Invest?", where the author claims that debt should be paid off irregardless of circumstances like interest rates on debts and investment returns. Hello?!!!

In another article in about.com, "Pay Off Your Debt or Invest?", the arguments are more well thought out, where there is proper accounting for the differences in debt interest rates and potential investment returns. It provides a financial novice with simple and easy to follow advice about what to do when faced with the invest or pay off debt dilemma.

One of the best financial advice sites I found is one where the author looks for loopholes in arguments by other financial advice sites :) I read this blog, Bad Money Advice, regularly on Google Reader and I am often amused and struck by how bad some of the financial advice that are given.

For me, I find that in Singapore, a lot of people have their money tied up in property. And the same people equate financial freedom with a fully paid off property that they lived in. This is bad financial advice too.

Financial Freedom is the ability to choose not to work anymore and if you have a fully paid off house but no money in the bank, that is not financial freedom.

Scenario 1.
A guy, John, pays more each month to pay off his $250,000 housing loan as fast as possible and manages to do this after 10 years instead of the original 30 year loan period. However, it is at the expense of no to negligible savings. John thought that he could plan to save for retirement more quickly after he had paid off his housing loans.
Scenario 2.
Another guy, Joe, pays the minimum for his $250,000 housing loan but chooses to invest his surplus money that he saves each month. After 10 years, he has a substantial portfolio of stocks, ETFs unit trusts and a 6 months of his salary as a buffer in the bank.

Question 1
If both guys were to be retrenched at the point of 10 years, who will be better off?

Question 2
If John and Joe died at this point, whose family will be better off?

Question 3
Assuming that the CPF rate remains at 2.6% for housing loan and investment returns are higher than that for the 10 years and beyond, who do you think is better off?

For all 3 questions, Joe, the guy who stretched his loan and invested wisely is better off than careful John. I used to think that the path John followed would be wiser, but after a conversation with an older and wiser colleague, I joined the 'dark side' and followed the 'Joe' path.

Which path do you follow?

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