We live in challenging economic times. Making this simple decision about whether it is time to pay down debt or time to borrow to invest, has become complicated. Interest rates are set to stay at record low levels for the next couple of years in the United States and this will likely mean low interest rates in Canada as well. Typically, low interest rates tempt people to borrow. However, economic growth is predicted to be slow over the next two years as well. Slow economic times tempt people to save their money and pay down their debt. If you are paying attention you will see that these are two opposite effects!
So do you pay down debt because times are slow or do you borrow money because interest rates are low? If you have debt then you pay interest. If interest rates increase then you pay more interest and maybe you have a harder time making minimum payments. If you pay a lot of interest, then you don’t have money to spend on other things, or to invest for the future. However, if you borrow money to invest, you can deduct the interest that you pay on that loan. Being able to deduct the interest means that the interest rate is even lower, depending on your tax rate.
Does it make sense then to borrow money to make investments? Yes – provided that you can find investments that will earn a higher rate than the interest you pay. What investments should you choose for your hard earned money? I am not an investment advisor but I would suggest that you consider investing in anything baby boomers might want or need. Think health care for example. The stock market often looks like a mystery but the baby boomers getting older is a fact!
What should your strategy be? Borrow and invest. Or pay down debt and feel more secure. Here are a couple of thoughts:
1. Refinance any debt that you can at the low rates that are currently in effect.
2. Borrow money to invest in anything that will earn more than the current rates of interest, this could be your business, real estate or shares.
3. Consider investing in the market if you have more than 10 years to go before retirement, as stocks are low now, but should increase in value over the next couple of years.
4. Don’t borrow to increase your lifestyle, borrow to invest for the future. 5. Don’t budget yourself too tightly, live is uncertain. You have to enjoy today, there may not be a tomorrow.