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Best Use of Extra Money - Investing Versus Paying off Mortgage Debt

Updated on September 11, 2011

Suppose you want to get rid of debt worth 40000 dollars (Rs 18 lakhs) and as assets you have two residential properties, one is a house you have taken on loan in which you are living worth 90000 dollars (40.5 lakhs INR) and another is a house worth 40000 dollars (Rs 18 lakhs), which you have inherited and is empty. You cannot sell the house where you are living but you can sell the house, which is empty or is of no use. The total 40000 dollars worth of debt is from:

1. Home loan (mortgage loan) of 30000 dollars with 11.75% floating interest rate.

2. Personal loan of 5000 dollars with 22.5% floating interest rate.

3. Car loan of 5000 dollars with 18.5% floating interest rate.

You have extra money - you have different options

Now how you will make the maximum use of your all assets to erase debt and make best use of extra money?

1. Will you pay back debt by selling the empty house?

2. Will you invest money in buying real estate in a hot location?

3. Will you invest in commodities like stock, etc.?

4. Will you buy mutual funds?

5. Will you keep the empty house (extra money) as it is?

Everyone says get rid of debt

There are many people around the world who have questions similar to above questions in their mind and many have solutions and make the best use of extra money they have, but whenever you will ask these questions to your friends or colleagues or an average person, everyone will say “Pay Off Your Debt” and have peace of mind and live a happy and fruitful life, but don’t you think that if you will pay off debt with all the extra money, what you will have in your hand, just the extra income that you are left every month. In simple words, the income that was previously going in paying debts as equated monthly installments will be completely yours and you can do whatever with that income invest or spend but my dear friend you must know it then whenever we have extra income, we “Spend More Than What Is Required”.

Finance tips to make best use of extra money

Now let’s come to the point, according to me, you need to make a proper plan to pay off debt, do some investment, and earn money which can serve as your long-term retirement income. For doing this you need to follow these steps:

  1. Sell the empty house for 40000 dollars and pay off 10000 dollars of debt on car loan and personal loan, which have high interest rates than mortgage loan. This will remove the extra stress on your monthly income deleting major EMIs from your monthly budget.
  2. Now invest your extra money 30000 dollars in buying SIPs (systematic investment plans) for a period of 5 years. The idea is to buy short-term SIPs from top best performing mutual fund providers like buying HDFC Mutual Fund worth 5000 dollars, Tata Mutual Fund worth 5000 dollars, SBI Mutual Fund worth 5000 dollars, Reliance Mutual Fund worth 5000 dollars, DSP BlackRock Mutual Fund worth 5000 dollars, Kotak Mutual Fund worth 5000 dollars. The total comes to 30000 dollars. Also different mutual fund providers have different types of growth rates.
  3. The above mutual fund providers are for example only and you need to do a little bit of market research to find the best providers.
  4. You can go for different mutual fund providers because there will be no risk in doing that. For example if your HDFC mutual fund income goes down and Reliance mutual fund investment goes up, it will compensate it. If Tata mutual fund goes down, SBI mutual fund will be there to compensate the losses. The idea is to earn an average income from different providers in a short period of time.
  5. In this way, at the end of 5 years, you will have increased your income by investing in mutual funds in SIP scheme. Your initial investment was 30000 dollars which will reach somewhere around 50000 dollars.
  6. So now you have 30000 dollars to pay off your mortgage debt and also have 20000 dollars extra money you have earned from SIP mutual funds, which you can reinvest for another 5 years or 10 years or do whatever you want to do with that.
  7. You will also have extra money in your pocket every month as your debt has been cleared and there are no monthly installments. You will be able to achieve healthy personal finances.

Your Money: Investing vs paying off debt?

Investing in SIP Mutual Funds involves very less risk and highest returns.
Investing in SIP Mutual Funds involves very less risk and highest returns. | Source

Pay off some debt and invest the remaining money

Always remember that life always gives us several different options to choose, but we need to be smart enough to choose the right option and change the way we live. If you choose to sell your empty house and pay off debt with extra money, you will have little in your hands but if you will pay off debt on loans at high interest rates and invest the remaining funds in different investment schemes, you can change your life. Least but not last, every type of investment carries a certain risk and you need to be prepared for that.

Best of luck

P.S.: In the above example:

  1. I talked about investing in SIP mutual funds because they carry little risk of investment and highest returns compared to investing in stocks, shares, and other commodities.
  2. Also, investing in high performing real estate is another good option but you need to give it at least 10 years to achieve best results.


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