Paying Off Your Loans Versus Investing - What Should You Do?
How much debt do you have? Five, ten, twenty thousand? Let’s assume that you have a $10 k student loan debt. Now lets also say you happen across $10k. Should you pay off your loan or should you invest the money? Could you make more money on an investment than what your debt costs you? If so, then invest. If not, then pay off your debt. Its simple economics.
The USA Today article, Pay Off Debt or Invest? That is the Question, sums it up best: Imagine you are paying 16% interest on a credit card. The same high interest rate won’t apply safely and consistently on an investment. In this situation you should pay off the debt. Sometimes, the best investment is avoiding the interest on a loan.
But not all debt is created equal:
Not all debt is the same. Some is what Bragar calls “good debt.” Examples would be mortgages or student loans or margin interest on a brokerage account. Some of the interest you’d pay on those loans is tax-deductible. That changes the equation.
Credit card debt, on the other hand is “bad debt.” You can’t deduct the interest you pay on credit cards from your income taxes like you could with a mortgage or student loans. According to Bankrate.com, interest rates on standard fixed-rate credit cards have an average of 13.08%.
But what about student loan debt? Student loan debt has the lowest interest rates possible. That’s cheap money. You can probably make at least that much or better on investments. So invest.
If you’re still not sure about investing versus paying off debt, look at Pay Off Debt or Invest? That is the Question or Should I Pay Off My Student Loans Early?
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One other thing to consider is peace of mind though. Many people ask this same question about paying off their mortgage early or investing and generally the same advice works. For some people however, the security and peace of mind of knowing that your debt-free is very valuable.
I commend you for what you are doing…it’s very creative. I have been working to pay off my own student loan. Something that I would like anyone that is going to graduate with a student loan is to start saving to pay something off your loan before you have to start making payments and when you start paying pay as much as you can. This is something I learned the hard way, I was sending my minimum amount and the loan amount wasn’t going down because of interest. The other mistake that I learned from is even if you do a job that pays a small amount of your loan for me it was $1000 don’t listen to your student loan company telling you that then you can ease up on payments for the next couple of months which I did and the interest brought my student loan amount right back to what it was before the $1000 was sent in to the loan company. My advice is pay more than you are asked for each month since most of it goes to interest not the principal. Also if you want to talk to someone about the student loan talk to the bank or a financial advisor. Wishing you much prosperity on paying off your loan and having a great, loving, prosperous life.
If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.