Should I Invest Or Pay Off Debts?

[corkman]

Dear All,

I am in a little bit of a dilema.

I have a little bit of money (about THB10k per month) that I would like to start investing to help wth income tax mitgation etc. but I also have a legacy of debts back in farang-land, so I am wondering what makes more sense...... invest or work to pay off debts?

The debts are not huge, but significant nonetheless. Interest on said loans are at 7% and 9% on amounts of Euro 8k and Euro 27k respectively. I am making the monthly payments on these loans, no problem, and they will mature in about 2yrs and 5 years respectively. If I clear these loans sooner, my "return" is gauranteed insofar as the interest I am paying on them. However, if I invest THB10k per month, I immediately gain back THB4k per month in repsect of income tax mitigation, not withstanding any "gain" I pick up in terms of return on the investment.

Obviously there is the risk "loosing" when you look at various investment funds, but the fund would need to fall by 40% before I would be physically "down" any money. It is of course a risk, but I get the feeling that the markets won't see any more huge crashes in the next few years.

I'd really appreciate peoples thoughts on the matter.

Many thanks,

CM

[trogers]

Will depend on your age.

I live by a simple rule - Be debt free when I turned 50.

[Soutpeel]

Pay the debts off first...as any gains you make off any investments are most likely "written off" against the interest rates you are paying on the loans.

Or find the middle ground, put some of the money into the loans and pay off quicker and some into investments and gets you started on both fronts

Edited January 9, 2011 by Soutpeel

[ronz28]

Get out of debt and be debt free. Its a wonderful feeling and you can then invest. We could have another market crash or at least a "correction".

[CWMcMurray]

I disagree with the others... but only because you have advised that you are working in Thailand and it seems that you are in the Top Tax bracket paying 40% income tax. This is based upon your advice that if you invest 10k per month you would get a refund of 4k per month...

This means a 40% guaranteed return on investment plus what ever gain you receive from the stocks themselves....

[asiawatcher]

There are a couple of issues to consider. I have advised in insolvency and the first thing to establish is are you going to return any time soon? If you intend staying in Thailand for a considerable period - say 5 years or more - then you have some options.

Agree with all's comments to remain debt free as soon as possible. But there are ways to alleviate debt that will not 'break the bank'. It is also a matter of conscience.

You may be able to resolve the debt issues by:

1. Make and offer to clear back home by raising around 50% of the debts in savings here then making an offer to pay. You can even offer as low as 10 cents in the dollar and you will find in the current climate that may even be accepted but never disclose what you are doing or where you are working, simply inform them you are living out of your country right now and do not see yourself being able to absolve the debt issue thus you are willing to make an offer. If your credit rating is already shot then don't worry - preferably have an accountant make the offer for you.

2. I have always advised, keep your liquidity and part with capital only when necessary but don't gamble on stocks or shares. Use the capital you have and work up from there. If you are paying interest at default rates then you will most likely not be able to recoup. Most creditors like banks (credit card providers) will have a provision for doubtful debts and I have seen people drop 40,000 USD to 12,000 USD and be accepted with provision no record of bad debt is recorded on the credit bureaus. Your choice.

3. Build on what you have here as the 10,000 Baht will go nowhere in retiring debt. If you have a decent salary, bank it to off shore like HSBC in HK and ask 50% of what you bank be contributed to cash management/investment and let them handle it for you. You will find the nest egg will rise. At least, take 10% of what you earn and drop it in a separate account. 10 pay days and you have saved 1 unit of your pay completely. This will compound. If you have credit cards - cut them up. In Thailand you can live without credit and it is a good way to stay out of trouble as 90% of people with credit cards just max them out in a month or two then cant figure out how to get them down. Sad.

Good luck at any rate. If you have a paid position here in Thailand you have a great opportunity to get out of trouble at the lowest possible living cost. G.O.O.D. advice stands for Get Out Of Debt!

[corkman]

Thanks for the advice everyone.

Yes, I plan on staying in Thailand for the medium-to-long term.

I think an important point to note is the income tax mitigation issue - which is why I am considering the investment rather than paything the debt. I pay over 60k in income tax per month, if I can get any of that back, then its gotta worth consideration. From my basic understanding, if I count the 4k tax rebate I get on 10k of THB and offset that against the interest rate (7-9%) on the equivelent sum towards debts then it would appear a no-brainer....... but there is obviously more to it than that, right?

Let me be clear - I do not have nay "debt problems". I comfortaby service my debts in farang-land AND live comfortably here. I am talking about paying an EXTRA THB10k per month of my debts at home...... for example one debt is 365 Euro per month - so I am talking about throwing an extra 250 euro per month against that, which would mean I would have it cleared in about 12 months instead of 24 months. Of the E365, about E35 is interest - so I would save 12 months worth of interest: 12x35 = E420 (about THB10k)...... in the same 12 months if I "invest" the same THB10k and get a THB4k tax rebate then 12x4k=THB48k.

I'll sit down, read, and digest your lengthy post (asiawatcher) later this evening. I have a very good credit rating and don't want to burn bridges uneccessarily in that regard.

THanks

CM

[asiawatcher]

Thanks for the advice everyone.

Yes, I plan on staying in Thailand for the medium-to-long term.

I think an important point to note is the income tax mitigation issue - which is why I am considering the investment rather than paything the debt. I pay over 60k in income tax per month, if I can get any of that back, then its gotta worth consideration. From my basic understanding, if I count the 4k tax rebate I get on 10k of THB and offset that against the interest rate (7-9%) on the equivelent sum towards debts then it would appear a no-brainer....... but there is obviously more to it than that, right?

Let me be clear - I do not have nay "debt problems". I comfortaby service my debts in farang-land AND live comfortably here. I am talking about paying an EXTRA THB10k per month of my debts at home...... for example one debt is 365 Euro per month - so I am talking about throwing an extra 250 euro per month against that, which would mean I would have it cleared in about 12 months instead of 24 months. Of the E365, about E35 is interest - so I would save 12 months worth of interest: 12x35 = E420 (about THB10k)...... in the same 12 months if I "invest" the same THB10k and get a THB4k tax rebate then 12x4k=THB48k.

I'll sit down, read, and digest your lengthy post (asiawatcher) later this evening. I have a very good credit rating and don't want to burn bridges uneccessarily in that regard.

THanks

CM

Hi Corkman,

May I suggest that you look at acquiring a condo here and then use the offset on a split mortgage to minimise your tax. That way you will own the real estate in under 5 years here and get minimal tax as well. If you want to have a chat send me a message. I have time at the moment between now and end of January. I may be able to help. Cheers

[CWMcMurray]

I think many are making this more complicated than it needs to be... this really is a no brainer as the interest rates you are paying on your foreign debt are relatively low.

The tax benefit by far outweighs the benefit gained by paying down the debt a year or two earlier, this is a very simple numbers game.

The Thai stock market has been doing very well the last few years, but if you really do not want to "Gamble" on stocks or bonds, you can realize the same tax benefit by buying life insurance. You can deduct up to 150k in premiums and will get back all of the premiums plus a little bit more after a set time. I have one of these policies where you pay for 6 years and then get a lump sum payout after 10 yrs. Its not a huge amount of interest, but when you figure in the tax benefit, they are not to bad. (although I would not recommend them to anyone who is not at least in the 30% tax bracket)

If you are going to be in Thailand for a while, then buying a condo may not be a bad idea and you can deduct up to 100k in interest on your mortgage from your taxes, but since we are only talking about 10k a month, that may not be feasible.

In your situation, I would continue to service the foreign debt and try to max out the tax benefits that you can gain in Thailand.

up to 150k in long term funds (must keep the funds invested for at least 5 yrs)

up to 150 in life insurance premiums

up to 100k in interest from mortgage

If you are in the 40% tax bracket, this could give you a tax benefit of 400k *40%= THB 160k (aprox EUR 340 per month). This means the tax benefit alone would allow you to service 94% of your 360 debt and does not include any benefit realized from any of your investments during this time.

This really is a no brainer...

Edited January 9, 2011 by CWMcMurray

[thrilled]

rule of thumb,if the interest is very low 4 or 5%.Pay the minimum balance every month.Invest the rest..

If the interest is high pay it off as soon as possible then start investing.Quoting Dave Ramsey And Suze Orman.

[Naam]

If you are in the 40% tax bracket, this could give you a tax benefit of 400k *40%= THB 160k (aprox EUR 340 per month). This means the tax benefit alone would allow you to service 94% of your 360 debt and does not include any benefit realized from any of your investments during this time.

This really is a no brainer...

BINGO! all said, nothing to add!

[PattayaParent]

rule of thumb,if the interest is very low 4 or 5%.Pay the minimum balance every month.Invest the rest..

If the interest is high pay it off as soon as possible then start investing.Quoting Dave Ramsey And Suze Orman.

At last someone who watches Oprah!!!

[Furbie]

Deciding what to do with your funds is very much based upon your own individual analysis of your debts, income, future potential income, and possible returns on investment. With an interest rate on debt of over 5%, over the medium-long run, it is much better to pay this down. Step one, get a suitable cushion of liquid funds to cover six months of your salary in case you lose your job or have unexpected bills. Step two, eliminate high interest rate debt. Step three, save and invest based upon your age and risk profile.

Someone here mentioned insurance products. Unless you are trying to protect someone in the event of your death, insurance products often come with very high fees and maintenance costs, which will limit your earnings – you need to calculate this into any interest and tax advantages it may have. In fact, most financial advisors that only make their income from fee based advice, not those who make commission by selling products, will tell you to stay away from these types of investments (exceptions being what I mentioned and if you are nearing retirement and need an annuity because you have not saved enough for retirement). There is also a risk that the company can go out of business – all your eggs are in one basket. Who would of thought AIA would be in the kind of trouble its in???

Follow the steps above, and look carefully at any invest you plan to make. Remember, even people who play the market well lose in the long run. If big time fund managers get it wrong, what chance do you have? Your best bet is always a diversified portfolio of no-load, low annual fee passively managed mutual funds. It's not sexy, it's not something to talk about at cocktail parties, but it's safe and has good returns on investment over the long run. Good luck.

Edited January 10, 2011 by Furbie

[121Advice]

I totally agree with the consensus that if you can service your 'ferrang debt' at 5%pa or less, then there is scope for you to invest regularly with a little more risk. Although you 'think' that the worst is over - no one has a crystal ball and something that has NOT been mentioned is the effect of 'pound cost averaging'. As a regular (say monthly) investor it is actually BENEFICIAL to you if the markets fall, as you will be buying more 'bang for your buck'. Over the longer term (you give yourself 3-5 years) the smoothing effect of investing monthly will mitigate most of the ups/downs. Not the case if you invest a lump sum and hold your breath (and start praying!).

If your debt is costing you more than 5%pa (unlikely in most eurozone countries for the foreseeable future) then PAY IT OFF. Pedigree equity income funds with moderate risk are likely to yield no more than 5%pa growing income yield, so the risk/reward premium is just not worth it unless you are an aggressive investor.

Assuming you continue to service your 'ferrang debt' at less or equal to no more than 5%pa then you can invest quite successfully on a regular monthly basis and if markets fall BE HAPPY as your monthly investment commitment will be accumulating more units in the down times, ready for when markets improve etc etc..

I also agree with the last post that you should avoid offshore investment bonds (insurance bonds) like the plague. Costly, immobile and usually with punitive early surrender penalties in the first five years. Stick with a basket of Unit Trusts, SICAVS, Mutual Funds [or equivalent] if they qualify for the tax rebate, or Thai blue chip stocks in cash rich sectors such as telecoms, utilities & energy - usually more stable longer term etc..

Hope some of the above helps. Good luck. Andrew

[CWMcMurray]

I think many who are advising this 5% break point on whether or not to pay down debt are not taking the tax incentives into account..

To make things easy... lets say you have debt of 10,000 USD and you want to know if you should pay off the debt or invest...

Lets even say the interest is 20%...

So 20% of 10,000 is 2,000

Lets say you invest your 10,000 in tax deductible investments in Thailand

the following year, you get a refund of taxes for USD 4,000 and the new debt amount is USD 12,000 but you also have USD 10,000 in investments

so lets say you pay down the debt with your refund and then the new balance is USD 8,000.

So if we compare paying off the debt with investing...even if we use a super high interest rate of 20% and if we assume 0% gains or even if we assume a 10-15 % loss on the initial investment of 10,000 USD, you are still better off investing than paying down the debt

Like I said earlier, this really is a no brainer...

Edited May 14, 2011 by CWMcMurray