What's a better use of my money - pay down debt or invest it in the market?
Best Answer
698 points
7million7years answered 3 months ago …
You might have more clarity if you rephrased the question as "what's better, to INVEST in debt or INVEST in the market", then it will be clear that INVESTING in debt returns you a guaranteed rate equivalent to the interest rate (plus ongoing fees, if any) being charged. On the other hand, investing elsewhere MIGHT return more, over the long-term.
So, your real question needs to be: "what investment will give me a greater return than my highest interest rate currently outstanding debt?" ... if you can find one (and, you have the skills/interest/knowledge/stamina) then invest in that, otherwise pay down some debt.
Naturally, start with the highest interest rate debts first and work your way down (google 'debt avalanch')
Answers
583 points
jillybeansisme answered 3 months ago …
At what rate of interest is your debt? How much debt do you have? Do you have an emergency fund? If you invest your money, what is the purpose for the money -- short term or long term? The markets are on a downward spiral and very volatile -- it might be more prudent to answer the above questions to determine the answer for the actual question.
You could always compromise and do both! It never is bad to pay down debt.
3127 points
EthanR answered 3 months ago …
Brad, I say always pay down debt first. Why? Because as 7 million said, you get a guaranteed rate equivalent to the interest rate and fees, and if you are talking about credit cards, that's substantial. But the other factor is that there is no risk to "investing in debt", while there is always risk to investing in the market. The only "risk" you would have by investing in debt is that you could miss a major market move higher. But of course the market could also move lower.
Now picture your life free of debt. How much money that you used to pay on your credit cards or loans is now free to invest in the market every month? More importantly, you have reduced your risk of life problems by being out of debt. If you pay off your mortgage, the bank can't foreclose on you. If you pay off consumer debt, you don't have to worry about bankruptcy should you lose your job, become ill for awhile, etc. And of course, high financial debt is also a contributor to marital stress and physical illness.
So I say pay down the debt first, and then invest like a demon in the financial markets.
209 points
Sensei answered 2 months ago …
There are two kinds of debt - good debt and bad debt. Good debt is what you incur to acquire an asset. Bad debt is the opposite.
What is an asset? It's the opposite of a liability. Obvious? I don't think so. The best definition of these terms is this ... in bad times, assets will feed you; liabilities will eat you. What is your home? An asset? Wrong! Read the definition. In bad times you still have to pay the mortgage, property taxes, maintenance, etc. It "eats" you. Your home is a liability! Strange, but true. To properly qualify as a asset, it should create positive cash flow. If it doesn't, it's really a liability.
"But there are capital gains!" Really? Take a look at the US housing situation today. Where's the capital gain? You call that an asset? Capital gains are not "guaranteed". Unless there is positive cash flow, there's no asset.
What about an investment property? If (and only if) there is positive cash flow, it's an asset - regardless of its current market value.
I'm going to assume from your question that the debt you're referring to is "bad" debt (e.g. credit cards, home mortgages, etc.) Get rid of it! You'll sleep better. And in the case of your home, you'll have the satisfaction of knowing that you own it "free and clear".
And, in addition to what I and others have already said, you should remember that paying down your debt increases your credit score ... bonus points!
408 points
SallyG answered 2 months ago …
As a general rule, I would almost always advise paying down debt, especially by paying extra to pay down prinicpal and cut future interest costs. After all, the less you owe, the less risk you have under adverse conditions. Jillybeansisme points out some important factors in your personal decision.
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