Paying Off Debt Or Investing: Which Should You Choose?

Whether you should pay off low-interest debt or invest depends on a number of factors. If you expect to earn more by investing than you would save by paying off your debt, it may be better to invest. However, if you have a balanced asset allocation, it may make more sense to pay off your debt first, especially if the interest rate is higher than 6%. Your level of wealth can also affect whether you should pay off debt or invest.

Paying off low-interest debt sooner may not be the best option if you expect to earn more elsewhere

However, it is important to note that the only interest rate that counts is the after-expense, after-tax, after-inflation rate. So, a tax-deductible debt, like a mortgage, is less of a priority than one with an equal interest rate that is not deductible. Additionally, if you have a low, fixed-interest rate debt and inflation is high, you will be paying off that debt with less valuable dollars the longer you wait.

Your level of wealth can also affect whether you should pay off debt. For example, if you have a high level of wealth, it may make sense to carry your mortgage longer and invest in a taxable account. On the other hand, if you have a lower level of wealth, it may be better to pay off your debt first and then invest.

Ultimately, the decision to pay off low-interest debt or invest depends on your financial goals and risk tolerance. It is important to consider your asset allocation, interest rates, and expected returns on investments before making a decision.

If the interest rate on your debt is less than 6%, it makes more sense to invest

For example, if you have a low, fixed-interest rate debt and inflation is high, you will be paying off that debt with less valuable dollars the longer you wait. However, if you invest your money instead, you could benefit from higher returns.

It's important to note that the only interest rate that counts is the after-expense, after-tax, after-inflation rate. So, a tax-deductible debt, like a mortgage, is less of a priority than one with an equal interest rate that is not deductible.

Additionally, your level of wealth can affect whether you should pay off debt. If you have the means, it may be beneficial to pay off any higher-interest debt while keeping lower-interest debt and using the returns from your investments to pay it off over time.

The only interest rate that counts is the after-expense, after-tax, after-inflation rate

When deciding whether to pay off low-interest debt or invest, it's important to remember that the only interest rate that counts is the after-expense, after-tax, after-inflation rate. This means that a tax-deductible debt, such as a mortgage, is less of a priority than a debt with an equal interest rate that is not deductible. For example, if you have a low, fixed-interest rate debt and inflation is high, you will be paying off that debt with less valuable dollars the longer you wait. Therefore, it may make sense to invest those extra dollars instead of paying off low-interest debt sooner, especially if you expect to earn more elsewhere.

However, it's also important to consider your financial to-do list before deciding whether to pay off debt or invest. For example, make sure you have an ample emergency fund in place before investing. Additionally, if you have higher-interest debt, it may be a good idea to pay that off first while keeping the lower-interest debt and using the returns from your investments to pay it off over time.

The decision to pay off low-interest debt or invest also depends on your asset allocation. If you have a balanced asset allocation, a 6% interest rate on your debt is a good threshold to consider investing instead. However, if you invest more aggressively, you can consider a higher threshold, and if you invest less aggressively, a lower threshold may be more appropriate.

Overall, by crunching the numbers and considering your financial situation, you can decide whether paying off low-interest debt or investing is the smarter choice for you.

Paying off debt first ensures you have an ample emergency fund

However, it is important to note that the only interest rate that counts is the after-expense, after-tax, after-inflation rate. Therefore, a tax-deductible debt is less of a priority than one with an equal interest rate that is not deductible. Additionally, if you have a low, fixed-interest rate debt and inflation is high, you will be paying off that debt with less valuable dollars the longer you wait.

It is also worth considering your level of wealth when deciding whether to pay off debt or invest. If you have a lot of wealth, it may be more beneficial to pay off your debt first to free up cash flow for other investments.

If you have a low, fixed-interest rate debt and inflation is high, you're going to be paying off that debt with less valuable dollars the longer you drag it out

However, it is important to consider your financial situation and goals before making a decision. If you have a balanced asset allocation, a general rule of thumb is to invest if the interest rate on your debt is less than 6%. If you are investing more aggressively, you can consider a higher threshold, and if you are investing less aggressively, you may want to set a lower threshold. Additionally, you should ensure that you are checking off other financial priorities, such as having an emergency fund, before deciding whether to pay off debt or invest.

It is also worth noting that the only interest rate that truly counts is the after-expense, after-tax, after-inflation rate. So, a tax-deductible debt, such as a mortgage, may be less of a priority than a non-deductible debt with the same interest rate. Your level of wealth can also impact your decision, as it may make sense to carry a low-interest debt for longer if you can afford to invest in a taxable account.

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