Debt Repayment vs. Investing: Which Comes First?

I have debt, but I also want to start NISA for my future.

I feel like my money won’t grow if I only focus on repayment.

To start with the conclusion, if you have high-interest debt, generally, repayment should come first.

On the other hand, if you have debt with relatively low interest rates, such as a mortgage or student loans, and you are repaying them as planned, you may be able to balance them with investing as long as your household budget allows.

It is important not to treat all debts as the same.

Investment returns are uncertain, while interest on debt is guaranteed.

Investing has the potential to grow your money.

However, you are not guaranteed to make a profit every year.

If the market drops, you could lose your principal.

On the other hand, interest and fees on debt accrue according to your contract.

By paying off debt, you can reduce the future interest charged on that principal.

In other words,

This is the difference.

If you think, ‘I’ll grow my money through investing first and then pay off my debt,’ you might end up with only debt if your investments result in a loss.

Create a list of your debts first.

Before deciding whether to prioritize repayment or investing, check the details of your debt.

Credit card revolving payments are also a form of debt.

Instead of thinking, “It’s only 10,000 yen a month, so it’s fine,” check your current outstanding balance and fee rate.

The Japanese Bankers Association also warns that revolving payments take a long time to pay off, which often results in higher fees.

Japanese Bankers Association “Credit Cards and Loans”

Debts to prioritize for repayment

If you have the following types of debt, it is generally better to prioritize repayment over investing.

While card loans can be used freely, they tend to have higher interest rates than loans with specific purposes.

Japanese Bankers Association “Card Loans”

Even if you invest while paying high interest, there is no guarantee that your investment returns will exceed the interest.

Even if you use NISA, the possibility of losing your principal remains.

Debts that can coexist with investing

The following types of debt can coexist with investing, depending on the contract terms and your household finances.

However, it is not automatically decided that you should invest just because it is a mortgage, or that you do not need to rush to repay a student loan.

Check the following points:

• What is the interest rate?

• Is it a fixed or variable interest rate?

• Is the repayment manageable?

• Can you repay it even if your income decreases?

• Do you have an emergency fund?

• Are there any major expenses coming up soon?

• Can you leave the money you invest untouched for a long period?

Even with low-interest debt, if your monthly repayments are putting a strain on your household budget, there is no need to rush into investing.

Order of decision-making

If you are unsure whether to prioritize repayment or investing, consider the following order.

1. Resolve any late payments

If you have any overdue payments, address them before investing.

Do not leave them unattended; contact your lender as soon as you realize that repayment is difficult.

2. Stop taking out new loans

Avoid borrowing from another company to pay off existing debt.

The Japanese Bankers Association also warns that taking out new loans for repayment can lead to multiple debt problems.

Japanese Bankers Association: “Mindset for Using Bank Card Loans”

3. Keep money for unexpected expenses

If you put all your savings toward repayment, you may end up needing to borrow again in the event of a broken appliance or illness.

First, keep a minimum amount of cash on hand to handle sudden expenses.

For example, one approach is to set a goal of saving about one month’s worth of living expenses.

This is just an example, so please adjust it according to your family structure and income stability.

4. Pay off high-interest debt first

While paying the minimum amount on all debts, put any extra money toward the debt with the highest interest rate.

Reducing high-interest debt will also lower the interest you pay in the future.

However, since methods and fees for early repayment vary by contract, be sure to check in advance.

5. Increase your emergency fund

Once you have paid off high-interest debt, increase your savings to prepare for illness or unemployment.

Generally, 3 to 6 months’ worth of living expenses is a good benchmark.

Single-income households, self-employed individuals, and families with children may require more.

6. Invest from surplus funds

Once you have a clear outlook on repayment and savings, start investing with money you do not plan to use in the near future.

J-FLEC also recommends that daily living expenses and money needed soon should be kept in savings, while investing should be done with money not needed for the foreseeable future.

J-FLEC ‘What is Asset Management?’

Do not simply compare debt interest rates with expected investment returns

‘The interest rate on my debt is 3% per year, and I expect a 5% annual return on my investments, so it’s more profitable to invest.’

You might be tempted to think this way.

However, a 5% annual return on investment is not a guaranteed profit.

There will be years when it grows significantly, and years when it results in a loss.

Debt repayment deadlines will not wait for you.

You need to consider not only the expected return on investment but also the following points:

• Can you still make repayments if the investment value drops?

• Is there a possibility that interest rates will rise?

• Can you continue repayments even if your income decreases?

• Will you have enough cash remaining?

• Can you continue investing for a long time?

It is important not to make decisions based solely on comparing expected investment returns with debt interest rates.

There is no need to use up your entire NISA allowance

‘It’s a waste not to use this year’s NISA allowance, so I’ll prioritize investing over repayment.’

You need to be careful with this way of thinking as well.

NISA is a system where profits earned from investments are tax-exempt.

It is not a system that guarantees the invested amount or profits.

The annual investment limit for NISA is not a target that you must use up.

There is no need to invest up to the limit at the expense of debt repayment or living expenses.

If you are already investing through a savings plan

If your debt has increased after you started investing, first review your new monthly contribution amount.

• Reduce the monthly contribution amount

• Temporarily stop the monthly contributions

• Direct the freed-up money toward repayment

• Review your fixed expenses

• Stop taking on new debt

Even if you temporarily stop your contributions, your investment experience to date will not be lost.

You can resume after you have paid off your debt and your household finances have stabilized.

Whether or not to sell the investment products you hold depends on factors such as the interest rate on your debt, unrealized gains or losses, and your emergency fund.

Instead of selling everything immediately, check your overall household finances.

If you have a surplus of 30,000 yen per month

For example, consider a household that has 30,000 yen remaining each month after debt repayment.

If you have revolving payments or card loans

• Savings for unexpected expenses: 5,000 yen

• Additional debt repayment: 25,000 yen

• Investing: 0 yen

First, reduce high-interest debt.

If you only have a mortgage

If you have an emergency fund and can afford the repayments,

is one way to allocate your money.

Both are just examples.

Depending on the type of debt, how you use the same 30,000 yen will change.

If repayment is difficult, seek advice rather than investing

If you are in any of the following situations, you are not at the stage to start investing.

• Cannot prepare money by the repayment date

• Paying off debt with other debt

• Do not know your lenders or balances

• Borrowing from multiple companies

• Covering living expenses with debt

• Repaying debt in secret from family

• Have received a demand letter

Do not try to solve this on your own; seek advice early.

The Financial Services Agency provides information on consultation services such as local finance bureaus, municipal offices, Houterasu (Japan Legal Support Center), and bar associations.

Financial Services Agency: ‘Measures for Multiple Debtors and the Money Lending Business Act’

Seeking advice does not necessarily mean you will end up filing for bankruptcy.

You can explore options suited to your situation, such as reviewing your repayment methods.

Conclusion for today

If you are unsure whether to prioritize debt repayment or investing, consider the following order:

1. Resolve any late payments

2. Stop taking on new debt

3. Keep cash on hand for emergency expenses

4. Pay off high-interest debt

5. Build an emergency fund

6. Invest using surplus funds

If you have revolving credit, card loans, or cash advances, repayment should generally come first.

For mortgages or student loans, which have relatively low interest rates, it may be possible to invest while paying them off if your household budget allows.

Growing your money for the future through investment is also important.

However, there is no need to seek uncertain returns while continuing to pay high interest.

First, stabilize your household finances, and then begin investing within your means.

Recommended books for those who want to learn the basics of money and investing

Before considering the priority of debt versus investment:
‘Super Revised Edition: I Don’t Understand Complicated Things, So Teach Me How to Grow My Money!’
by Hajime Yamazaki and Kosuke Ohashi / Bunkyosha

This book explains the roles of savings and investment, as well as asset formation using NISA, in a friendly, conversational format.

It is also suitable for those who want to organize their household finances and the basics of money before choosing investment products.

You do not need to follow the methods written in the book exactly as they are.

Please make decisions based on your debt interest rates, repayment terms, and your household financial situation.

We also explain this simply on YouTube.

The content of this article is also explained in an easy-to-understand way on YouTube.

If you don’t have time to read the text, or if you want to listen while doing chores or commuting, please check out the videos as well.

I post videos that are easy for busy people to understand regarding money and NISA.

If you don’t want to miss future videos, I would be happy if you could subscribe to the channel.

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*Repayment terms for debt and appropriate responses vary depending on contract details and household financial circumstances. Investments carry the risk of loss of principal. If repayment is difficult, please consult your lender, a public consultation service, or a lawyer as soon as possible. This does not recommend any specific products, repayment methods, debt consolidation, or investment strategies.

References

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