Debt Repayment – a risk-free investment policy

Posted by admin on Mar 3, 2011

Have you ever thought that repaying your debt may actually be regarded as a powerful investment tool? Let me tell you that yes, it can be. If you can manage to make some extra payment along with your normal payment schedule, you can be the ultimate winner. First of all you can secure a considerable amount which could have been stacked away in late fine and other default charge. In brief I would say that your extra payment towards the interest of your debt is an investment in terms of gaining good return with equal interest rate on your debt amount. Further, it is also a risk-free after tax income. Thus you can hit two birds at one shot- you are getting debt relief as well as gleaning monetary benefit out of it.

Let me stretch my point with an illustration. Suppose, you have incurred credit card debt and you are liable to pay at 10% interest rate. Now every additional payment that you have made over your obligated charge will come to you as a 10% after tax return.

Comparing with other schemes where you can get tax exempt return, this one is lucrative enough. In many cases they have some stringent restrictions and limitations like age bar or low interest etc. If you hold the instances of Roth IRS or municipal bonds, they have their respective limitations and restriction. Only saving your money in 401k or such type of other plan like 403b retirement saving plan, you can get maximum tax benefit on your return.

With debt repayment strategy, the more entangled you are within marginal tax bracket, the more ‘investment’ debt repayment you incur. Therefore, in order to assuage the mounting tax, your level of return must have to be higher.

When you consider the matter from the compulsion of income tax payment on your investment, paying extra on your credit card charge or paying at high interest credit card should be deemed to be leading you towards your profit. Let me explain with a fictitious example. Suppose, you are paying your credit card debt at 20% interest rate, now if you are under 15% tax bracket you can enjoy a huge 25% investment return.

The purpose of this article is not to recommend or appreciate your debt but to suggest you that extra repayment on the interest can be beneficial in terms of investment return.
This post is Guest post, written by Kevin Craig | Financial content & news writter

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