Exchange-Traded Funds (ETFs)
Having a significant amount of debt can be a major hindrance to growing your savings and investments over time. Whether it’s a mortgage, line of credit (LOC), student loan, or credit card debt, it’s important to find a balance between managing your debt and saving and investing for the future.
If there exists a concept of beneficial debt, this is it. Tax-deductible debts encompass mortgages, student loans, business loans, investment loans, and other loans where the interest paid is refunded to you through tax deductions. Given that this debt generally carries low interest rates, you can simultaneously develop a portfolio while reducing it.
The debts we emphasize here are long-term, low-interest, and tax-deductible debts, such as mortgage payments. If you have high-interest debt, it is advisable to prioritize paying it off before embarking on your investment journey.
Not all interest-bearing loans qualify for tax deductions. It is essential to verify with your lender or a financial expert whether you can deduct the interest on your loan.
Growing Wealth through Compounding
Eliminating debt, especially a loan that requires long-term capital, deprives you of both time and money. In the grand scheme of things, the time lost (in terms of the compounding period of your investment) holds more value than the actual money paid (comprising the principal and interest paid to your lender).
It is crucial to allow your money ample time to compound. This is one of the reasons to initiate a portfolio despite having debt, though not the sole one. While your investments may be modest, they will yield greater returns compared to investments made later in life due to the extended time for growth.
Developing an Investment Strategy
Rather than constructing a conventional portfolio with high- and low-risk investments tailored to your risk tolerance and age, the strategy involves substituting your loan payments for low-risk and/or fixed-income investments.
Consequently, you will witness returns from reducing your debt burden and interest payments instead of the 2% to 8% return from a bond or similar investment.
The remaining portion of your portfolio should concentrate on high-risk, high-return investments like stocks. Even if your risk tolerance is minimal, the majority of your investment funds will still be allocated towards loan repayment.
