I've once asked on leo threads and other groups that if you have some excess cash, would you rather pay off an existing debt where the balance generates 5% interest per month? Or would you put it in an investment that pays out 7% monthly dividends? I've got a mix of answers, and logic dictates that it is better to invest. But for those (including myself) who answered to pay off debt first, the decision is more tied to emotion rather than math. Getting that peace of mind and being free of the consequences of borrowing has a greater positive psychological impact compared to the opportunity of earning more.
The debt paradox refers to a situation where taking on some level of debt can be both advantageous and disadvantageous at the same time, depending on the context and how it's managed. It highlights the dual nature of debt, where it can be a useful financial tool but also a potential burden if not handled properly.
Getting out of debt could be a real struggle, oftentimes it could feel like a never ending vicious cycle that could be extremely detrimental to ones mental and emotional health. When you borrow some money, it comes with this little devil called interest. Interest is like a parasite that just keeps growing. You pay off some of your debt, but a chunk of your payment goes to interest. So, even when you're making progress, it feels like you're treading water.
There's also the minimum payment trap, credit card companies, banks are sneaky and manipulative. They will set the minimum payment low, making it seem like you're making progress. But in reality, that's just the interest, and you're barely scratching the surface of your principal loan. It's like trying to empty a swimming pool with a teaspoon, it just won't end.
On the flipside, debt and credit can create opportunities by providing access to funds that can be used for investments, education, or starting a business. It can provide short-term benefits by allowing immediate access to resources that might take years to save up for. In my case, using debt allowed me to purchase a car as well as a property, both of which have generated income for me at some point. Another advantage is that because I took out a mortgage from a preselling property at the time, I was able to take advantage of the lower cost of the property. If I took my time to save up money for the condo, it would have taken years to save up and chances are the prices have already ballooned.
On a personal level, we as humans may experience the psychological paradox of debt. I have been on both ends, from my earlier years of working, debt caused me pain and mental anxiety, I felt that my car and condo payments were going towards nothing and I was just handing out interest to the banks. It felt like a cycle which was draining every motivation that I had. However, in hindsight, I believe I was able to make good out of it as the car is now fully paid, and the property is self sustaining thru rental income.
Going back on investing vs paying off debt, one point I'd like to add is that paying off debt is a guaranteed return on your money. By reducing debt, you are saving on interest , which in essence is a risk-free return. Purchasing stocks, on the other hand, carries market risk. The value of stocks can fluctuate, and there's no guarantee that you will receive a consistent 7% monthly dividend.
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