I’ve seen a lot of questions on a website I frequent, Stockpickr.com, regarding debt and investing. I need to point something out. Unless it’s debt such as a mortgage or a student loan, there is no reason why you should use spare cash to invest in the stock market instead of paying down debt. It doesn’t make sense mathematically unless somehow you’re the next Warren Buffett or George Soros. Let’s take an example of why it’s silly to invest in the stock market instead of paying off credit card debt:
Blogger A has $1,000 in credit card debt at a rate of 15%. Blogger A also has $1,000 in excess income. Blogger A feels that investing in the market while paying the minimum on his credit card is worthwhile, since he sees so many folks hitting it big with the market. Assuming Blogger A, his first time investing ever, can make a 10% return on his investments (S&P500 average in the past):
From Bankrate.com’s Credit Card Calculator:
$1,000 starting balance @ 15% interest while paying the minimum amount: It will take you 147 months to be rid of your debt. In that time, you will pay $911.56 in interest.
Assuming that same $1,000 investing returns a daily compounded 10% rate of return, the future value of that investment will result in a future value of $1,105.16, a difference of $900.
Moral of the story: Pay your debts first before you invest. You’re saving much more money in the long run than attempting to beat the market and win big. And for the love of everything that can make you money, don’t ever draw equity from your home in order to invest. Your home is the heart and soul of your family. There’s no need to risk it. If you’re seriously interested in investing, create a budget or find a second job.