It is prudent to pay off the most expensive loans before investing

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I have a debt of around Rs.3 lakh on two of my credit cards, and I also pay equated monthly instalment (EMI) ofRs.15,000 towards my car loan. I am 41-years-old and earn around Rs.1 lakh a month. My monthly expenses areRs.75,000. What sort of a plan should I have so that I can first pay off my credit card debt and then work on buying a house in the next 5 years?

—Sanjiv Khatri

As you too realise, one should paying off the expensive loans first. And with credit card interest rates on outstanding amounts being one of the more expensive debts today, it is always prudent to repay credit cards at the earliest. This debt undoubtedly gets preference over investments.

You must pay the loan before you start investing.

With a surplus of income over expenses currently atRs.25,000, it is assumed that your expenses already cover the EMIs. You need to start repaying the maximum on your credit card loan.

Accordingly, this amount should be converted into an EMI of Rs.25,000 for the next 12-14 months. You may have to pay for 14 instead of 12 months because of the accumulated interest on your loan. Apart from this, if you have any extra amount in between, use it to repay the loan.

Second in line is your car loan. This also carries a high interest rate, though not as high as that of the credit cards. In some cases, car companies absorb a part of the loan cost, depending on the demand for a particular car. This is more like a marketing expense for them. Check if your car loan carries any pre-payment charge. If not, and the interest rate is higher than what you could earn in a reasonably secured asset, then consider repaying the loan.

Only after you have repaid your loans, especially the credit card loan, should you start investing for your house or any other investment goal.

You plan to get a house 5 years from now. Assuming that you devote one of those years to credit card repayment, there would still be around 4 years left to plan for the house.

Start with a monthly saving plan to create a cash-down fund for the property. In four years, you should be able to accumulate about Rs.12 lakh (Rs.25,000*12*4). Any increase in monthly savings over the next few years has not been considered; but it can add to the corpus. At an interest rate of 10%, the total corpus becomes Rs.14.8 lakh. The required amount depends on how much down payment you need for the house.

In the quest for earning more from the corpus, don’t get aggressive with your investments. Do consider equity exposure for your investment book, but its extent that should be based on your risk appetite. Also, as you have only a 4-year horizon, you cannot be aggressive with this investment. It can be built via a systematic investment plan (SIP).

Within your savings basket, don’t forget to start creating investment baskets for your other investment goals such as retirement, and also an emergency or contingency fund.