Is Paying Down Debt The Best Investment?
You have debt, but you also want to invest. You want to live debt free, but you also want to save for retirement. Which route is best?
The Good, the Bad, and the Inevitable
Bad debt is the easiest way not to achieve financial success. Yes, there is good debt and bad debt.
Good debt is the money you borrow at a low interest rate to achieve a high rate of return, an investment loan to max out your RRSP contribution, for example. We can lump a mortgage into this category as well. For most people a mortgage is inevitable, and it can produce income.
Bad debt, is consumer debt – money you borrow at insane interest rates to buy things that don’t generate income or appreciate in value. Cars, TVs, vacations, for example.
The Price of Bad Debt
The cost of bad debt is an excellent interest rate, working against you. If you have a credit card charging you 20% a year, that’s 20% a year compounding against your retirement.
Don’t Lose Money Paying High-Interest Rates
Imagine you have $10,000 invested, producing a 10% rate of return, but you have a credit card with a 20% interest rate carrying a $10,000 balance. Obviously, you’re not doing yourself any favours.
Even though we’re making a super sexy 10% return, you’re actually down 10% because of your credit card at 20% with a balance. (10% – 20% = -10%)
So, instead of investing that $10,000, imagine you paid your credit card off. Then you’d be winning with a 20% rate of return on your investment.