I know we all struggle with what to do with our excess money each month. YEAH RIGHT! But there is a question I would like to address. Should we pay off debt or invest? Some things to consider may be…
Type of Debt
There is a big difference between consumer debt (credit cards, vehicle, etc.) and mortgage debt. What did you spend the money on? Was it clothing or dinner that has long been gone, or is it a house that is hopefully going up in value?
Some people answer the question whether to pay off debt or invest using the interest rate as their deciding factor. It is easy to decide if you are paying 23% on that credit card, but let’s say you have a home mortgage with an interest rate of 3.0% and you are looking at a mutual fund with a historical return of 10%. This 7% difference is what we struggle with.
Dave Ramsey has an interesting way to help answer questions such as this. Turning the question around, ask yourself, would you take out a 3% loan to invest with a possible rate of return of 10%?
I like to only think of things that I know will not change, that aren’t variable or dependent upon other factors. The interest rate on that mortgage (if it’s a fixed rate loan) will stay the same. There will be no change from month to month, always 3%. However, there is a lot that can change in regards to that mutual fund. Nothing is guaranteed.