Don’t invest if you have high interest rate credit card debt
Should I invest or pay off the debt is a question that people with debt but wanting to invest often ask. The answer is it depend on the type of debt and interest rate the debt have.
This is not legal advice, this is just my opinion, you should do your own research.
Example
I’ll use the credit card debt and high interest rate example.
If you have a credit card debt with a 20% interest rate on the debt. For simplicity I’ll use a very small number with simple interest.
If you have a debt of $100 with a 20% interest. It means that you are paying $20 per year in interest.
When you invest on the stock market, the point is to make a profit.
If you invest $100 on the stock market and the rate of return is 10% per that year. It means that your earn $10
Therefore, in this example is best to pay off the credit card first before investing.
The reason is, you are paying 20% interest rate yet only earning 10% rate of return.
If you do the math -20% + 10% = -%10, so you are losing 10%
Hence,
If the debt interest rate is higher than the investment rate of return then is a bad idea to invest. It’s better to pay off the debt first then invest.
When to invest if you have debt
If your debt interest rate is lower than the investment rate of return then is good to invest.
Example
If you invest $100 with a 10% rate of return on your capital then you are earning $10 pear year.
If you have a $100 debt with 3% interest rate then you are paying $3 per year.
So, $10-$3 = $7 you profiting seven dollars.
Or in percentage, 10%-3% = 7%, so you are profiting 7%, in this case make total mathematical sense to invest even though you have debt.
Financially wealthy people use good debt to become richer
If you want to get rich, you ought to use other’s people money to become richer.
Same example.
You can take a $100 loan at 3% interest, then you take that $100 and invest it in the stock market earning you 10% per year.
Therefore, 10% – 3% = 7%, you are profiting 7%.
This could work with any amount of money. I like to use small $100 number so people can quickly do the calculation in their head, so it can be simple to understand.
That’s it.
Take a calculated risk.
Now, start and adjust as you go.
