Question

discussion forum between two persons:- " the time value of money " personal or professional financial decision you have made .

first person:-The time value of money concept is something that i think about pretty regularly. As I am starting out in my career, there are so many personal finance decisions that i think about very frequently. The most recent rule of thumb that i have been following is it is better to put cash towards paying off debt that has a 3% interest rate rather than trying to find an investment that may make me 3%. The 3% debt is a guarantee while the possibly making 3% is more risky. With this in mind, i often times find myself choosing to put cash towards debt. Does anyone have any thoughts on if this is a good idea at a young age or maybe not such a good idea?

reply RESPONSE to the 1st person post from the side of second person ( a response should be critical analysis of the post) :- 100-150 words

Answer 1

Reply from second person to first person: Financial planning should be comprehensive and holistic. It is not just about earning returns or pushing cash towards debt but about many factors. First stage in financial planning is to have sufficient liquidity in hand to meet any emergency requirement of funds. On an average, a person should have at least 3 months expenses in liquid form. If all money is pushed to pay off debt, then it may create liquidity problems. It is a good idea that paying debt having 3% interest is a guaranteed whereas earning returns of 3% are risky. First of all, we should not encourage this idea that Debt is always bad. Only that debt is bad which is having very high cost. Low cost debt is good. For example, if cost of money in this case is 3% but if this debt can be invested to earn more than 3% in a situtation where risks are calulated then this 3% cost of debti is good otherwise it is bad. As a thumb rule, a person should invest in equities equal to 100 minus his/her age. for example, if age in this case is 26 years, then he/she should invest 100 minus 26 which is equal to 74% in equities. pushing money always towards debt is not a good idea. The investments must be diversified. Investments must be across various assets classes. Therefore, financial planning should be comprehensive keeping in mind various financial goals not only obsession of having to push money towards debt.