Why you shouldn’t rush to pay off your debts

Reducing your debt levels may not be the most logical use of your cash.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Public domain.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For many people, being in debt is a part of life. Paying for a car or a house often requires borrowing. As long as the amount borrowed is sensible compared to your income, the cost of servicing the debt remains affordable and financial difficulties do not arise.

However, paying off debts is a central goal in many people’s lives. The idea of owing others can be an uncomfortable situation, even if the repayments are affordable. Therefore, when interest rates are higher than the income return from assets such as shares and bonds, the logical thing to do is to pay off debts as quickly as possible.

That is not the situation at the present time. It is possible in countries across the globe to borrow at a lower rate than the income return on national stock markets. For example, in the US the S&P 500 yields 2.2% at the present time and interest rates are just 0.5%. Similarly, in the UK interest rates are 0.25% and the FTSE 100 yields 3.7%. Therefore, it is possible to borrow at a low rate and generate a higher income return from investing in a diversified range of companies.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

Clearly, this idea is not without risk. Interest rates in the US are forecast to rise over the medium term and this could cause the profit generated from investing borrowed money to be reduced. However, the Federal Reserve continues to adopt a dovish stance which means that there is just one rate rise forecast for the next year. In fact, US interest rates are expected to be 2.25% in 2020, which is still relatively low and only 5 basis points higher than the S&P 500’s yield.

Another risk from investing borrowed money is that the value of the asset purchased can fall. A 2.2% income return on the S&P 500, for example, would be of scant consolation if the index dropped by 10% or more. And if a recession hit and caused uncertainty regarding employment, an investor’s ability to repay debts could come under pressure.

However, the idea of investing borrowed money still has merit. What it could mean in practice is that instead of rushing to pay off debts as quickly as possible, an individual maintains a level of debt over the medium term which remains very affordable and within their financial means. This money could be used to invest in a diversified portfolio of shares in order to generate higher returns for the investor.

While this will increase the overall risk profile of a portfolio, the potential rewards would also be boosted. The end result may be a superior risk/reward ratio which means that a debt free life may not be the most efficient use of capital at the present time.

Should you buy HSBC now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »

Investing Articles

This 10-stock ISA portfolio could yield £1,380 in passive income a year!

Here's a portfolio of dividend shares that could produce £115 of monthly passive income for investors who maximise their ISA…

Read more »