Sep 14, 2016
Personal Investor: Time to make debt an investment priority
By Dale Jackson
Another day, another study on how Canadians are falling deeper in debt. This time consumer credit agency TransUnion found that even the slightest interest rate increase could make the debt burden unmanageable for many households.
Debt may seem like a tired old story, but it can be seen in an entirely new light by turning it upside-down and viewing it in investment terms. Here are a few fresh ways to look at debt:
- When you pay down debt you are recovering a portion of the principle, plus the interest you are paying. Paying 18 per cent on a credit card balance is the same as earning 18 per cent on an investment (good luck finding that).
- The power of compound interest is often overlooked for both debt and investing. Over time, interest generates more interest and that interest generates interest, and so on. To better illustrate the impact of compound interest, use “the rule of 72.” You can find how long it will take debt or an investment to double by dividing the interest rate into 72. At 10 per cent it will double in 7.2 years. At four per cent it will double in 18 years.
- Investing in your own debt is risk free. Every dollar paid against debt is certain to lower the amount of interest you will pay. Try finding a risk-free investment that pays out the amount of interest you’re paying on your debt.
- Finally, it’s tax free. The interest payments you save by paying down debt are never taxed. The only way to match that type of tax efficiency is through a tax free savings account (TFSA).
Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI
