I can’t even count how many times I’ve asked myself this question and yet. I always had an issue evaluating it. At first glance, It may seem like a simple problem, where your solution is basic math applied to both rates of interest. If the interest on your investment is higher than your debt then it’s smarter to invest instead of paying off debt.
Let’s say your debt has an interest rate of 8%, while the stock market returns are at 10%, doing the math you will end up with an additional 2% on the stocks and you may see it as a better way to invest.
Sounds simple, right?
It’s not that simple, and let me put it in a different perspective. Over a 10 year period, what will set you free and without a financial burden? Paying off your debt or investing into stocks?
I used a tricky question, but that is because I wanted you to take into account the risk. You see, on the short term the numbers look great, but we’re biased to not see the risk involved.
It’s always better to pay off your debt first
For the vast majority of people, it’s always better to pay off debt first, because it gives you financial independence while you’re keeping a positive net-worth.
Let me share with you a quote from a book written in 1880, what was true then about debt is true even today, 139 years later.
Money is in some respects like fire; it is a very excellent servant but a terrible master. When you have it mastering you; when interest is constantly piling up against you, it will keep you down in the worst kind of slavery. But let money work for you, and you have the most devoted servant in the world. It is no “eye-servant.” There is nothing animate or inanimate that will work so faithfully as money when placed at interest, well secured. It works night and day, and in wet or dry weather.ART OF MONEY GETTING
by P. T. Barnum, 1880
This book is completely free, if you want to read you can find it by clicking this link here.
It’s always better to pay off your debt before investing
I wanted to highlight this, I think it’s an important rule when you are building your wealth. I’m saying this from a position where I took a lot of debt in order to accelerate my net-worth growth, but I can tell you from the other side that now I’m going conservative paying off all my remaining debts.
If you followed my blog you would know that I’ve been on the other side of the fence and I can tell you that stress can get to you when you are dealing with debt. It’s much simpler to build wealth when you are debt free and why not do that instead.
The debt will limit your horizon because now you will no longer be able to leave your job or take a certain “risky” action because you are bound by payments. Next time when you will have this question think about what will be better on a decade from now for your well-being?