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I firmly believe that paying off debt is the best investment with the greatest rate of return. For every dollar that you pay back in debt on top of your minimum payment, that’s less money you will give to your creditor. This does not mean I don’t believe in investing, but rather I want to take care of my priorities first.
There are other reasons why I think eliminating your debt is a great investment. It’s closely tied to our psychological and emotional side. The feeling one gets when they pay off their credit card or student loan is priceless. I am experiencing this first hand since paying off my credit card debt.
Debt Payments as an Investment
Let’s plug-in some real numbers and for arguments sake, I will use my credit-card debt as an example. When I started out, my credit card debt was $3,500. I managed to pay my credit card debt in 347 days. My interest rate on the card was 12.9%, which I managed to negotiate down from 19.99%.
For every $100 extra dollars I paid, my annual return rate was $12.90 or 12.9% compounded monthly. That means on my initial $3,500 my total dollar return was $479.18. That essentially means I kept $479.18 in my pocket by paying off my credit card. This additional $479.18 saved, I could use to pay down further debt, such as adding it to my mortgage or use it towards investing.
What’s Right For You?
We’re all in different parts of our lives, and some of us carry more debt than others. Some debt is considered good debt, like a mortgage. Than there is obviously the bad consumer debt, such as credit cards. The key to it all is to assess what is right for you now and where do you want to be in the future. I made the decision to eliminate all of my debt (not including my mortgage), before considering investing. I wanted a clean slate, a fresh start and another chance to make it right and live a debt free life.
The key is to find your comfort zone. I was not comfortable with investing my money, when I had debt to pay off. It just did not make sense to me logically. You may be different. Find out what works for you.
The Psychology Behind It
No one can tell you what to feel or think. Same goes for investing and paying off debt. For me, it was important to crush my debt. Why? It’s has to do more with psychology than anything else. Debt is powerful and plays an emotional game with your mind. It did with mine at least, until I grabbed the bull by the horns and took control of my debt situation. I prioritized my debt. I knew I wanted to become debt free, before considering investing. I did what was important for me.
A Financial Highway article talks about the emotions of knowing when to invest versus paying down debt. Ray illustrates a simple logical approach on making the best decision for you. One writer who focuses heavily on Money Psychology is Ramit Sethi, have a look at some of his articles. One clear message that comes out from both articles: do what’s important for you. So if you want to pay off your debt and invest all the same time, then do it. I paid off my credit card debt, before considering investing. I knew once I was credit card debt free, I would be happier inside seeing a big fat zero next to “Amount Owing”.
For me it was important to work on eliminating my debt, before considering the investment side of things. I am happy I made the right decision a year ago, when I embarked on my journey out of debt.
Readers, what are your thoughts? Would you consider investing while holding credit card debt?