Debt in present time is a reality; whether it's a home loan, auto loan, student debt or medical bills, you will be having some amount of debt in your life. And it is quite natural for you to pay it off as soon as possible so that you can head towards a debt free life. Though paying off debts is something that must be topping in your priority list. But at the back of your mind, you must also be having the thoughts of putting money away for your retirement account or for some other important milestone in your life.
With a limited cash flow, it’s an either- or decision. You have to either opt for paying off your balances or investment. Neither of these situations will leave you feeling completely satisfied, it in fact throws you into a quandary. If you are in this dilemma whether to invest or to pay off, then you must consider the rate of return. For instance, you have a credit card debt with 22% interest rate, but the factor to consider here is can you earn 22% safely and consistently on an investment? The probabilities are pretty less, so in this case it is better to pay off the debt first. Credit card debt is actually a bad kind of debt. The reason being you can't eliminate the interest you pay on credit cards from your income taxes.
However, not all debts are bad some are good too, like a home mortgage. If you have a 6% mortgage loan and you pay a 25% income tax rate, then the after-tax cost of your loan is only 4.5%. That's pretty affordable. You can probably make at least that much or even more than that on investments. So investing is not a bad idea in this case.
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