Here is a question people may ask: What is the best investment you can find? If you haven’t paid off your credit card balance in full and still owe money, or if you have a personal loan, the answer is usually to pay off your debt.

Many people don’t think of loans as an investment.

Technically, that’s true.

However, if you’re paying a high interest rate on a loan, you’ll usually be in a better financial position if you pay off the loan rather than put money into a unit trust or another investment.

A simple example shows the reason.

The interest rate on credit cards is often about 28 per cent.

If you owe S$1,000 at 28 per cent and pay S$50 a month, the calculator on financial education portal MoneySense shows that you will pay S$362 in interest during the two years and four months it takes to pay it off. 

Compare that with investing in an exchange-traded fund (ETF). If you put S$1,000 into the Nikko AM Singapore STI ETF on July 1 last year, you would have ended up with about S$53.70 by June 30 this year, equivalent to about S$125 over the course of two years and four months.

A more conservative investment in bonds through the Nikko ABF Singapore Bond Index Fund would have earned you about S$50.40. And a time deposit at 1.7 per cent would only get you about S$17.  

Admittedly, rates on personal loans or debt consolidation loans can be lower than on credit cards, at about 7 per cent. The cost is still higher, though, than what you’ll often earn on ETFs, time deposits or unit trusts. 

The impact of that debt can be more than just financial, too.

A study by Associate Professor Irene Ng from the National University of Singapore (NUS), NUS Social Service Research Centre staff member Ong Qiyan and Associate Professor Walter Theseira from the Singapore University of Social Sciences found that being chronically in debt hurts a low-income person’s ability to think clearly and make good decisions, so that they may not acquire new skills or try new things.

While the math may seem mind-numbing, the message is clear. If you owe money on a credit card or personal loan, pay off them off before you invest. And if you borrowed money from a moneylender, at up to 4 per cent a month, it’s even more important to pay off the loan.

HOW TO PAY OFF THE LOAN

It’s easy to say that you should pay off your loans. The hard part is doing it, especially if you have unexpected expenses, or a low income, or you’ve gotten used to borrowing on your credit card to pay for activities.

Experts suggest five steps.

1. Calculate the total that you owe. You can start by taking all your monthly personal loan and card statements and adding up the amounts, or you can see them all on a credit report that you can order from Credit Bureau Singapore by paying S$6.42. Don’t include your mortgage, since the interest rate is lower. The total may still be larger than you expect.

2. Check the interest rates on each loan or credit card and the minimum payment. While monthly payments on loans are often fixed, credit cards may allow you to pay a minimum of about 3 per cent of the balance. Use the information to add up the total monthly payments. You can use that amount and the MoneySense Debt Calculator to see much you’ll need to pay monthly to pay off all the loans within about two years.

3. If the interest rates are high, consider restructuring your debt to reduce your payments. You could use a personal loan or a balance transfer, for example, to pay off a higher-cost loan. If you really struggle to make the monthly payments, check out the Debt Consolidation Plan offered by financial institutions here. If you qualify, consider applying for it. The financing programme can last up to 10 years and reduce your interest rate as well as monthly repayments.

4. Prioritise and pay on time. Once you know how much to pay each month to become debt-free, start paying as much as you can and don’t borrow more. You should pay off loans or cards with the highest interest rates first and pay on time. If you use the automated payment facility Giro to pay your bills, you won’t forget. 

5. Make lifestyle changes. You may need to make changes such as skipping travel for holidays, cutting back on shopping, not watching movies and eating at home to get the money you need. It’s important not to cut back on necessities, of course, so that you stay healthy.

Developing a budget that shows your income and expenses can help you see what expenses to cut to repay your loans faster.

While paying off debts is essential, some experts also recommend starting a small emergency fund.

The reason, investment advisor The Motley Fool explains, is that emergencies inevitably happen.

If you have no money to cover them and you borrow to pay the expense, you’ll constantly be in debt and never really improve your situation. 

While investing is clearly essential, getting rid of high-cost debt is even more important. Even though it may be hard, help yourself by figuring out how to pay off your loans so that you can start investing for a better future.