Comparing Investments and Debt

Posted by: Sophie H. | Apr 16,2008

The point of the stimulus package, which puts money in each taxpayer’s pocket, is to stimulate the economy.  Chances are that most people aren’t going to cash the refund check and stash that money in a shoebox under the bed.  No, he or she is going to put it in the bank, spend it on something frivolous, pay down debt, or invest it.  Any way you slice it, it will stimulate the economy – even if you choose to leave it in the bank, though Bush is counting on you spending rather than saving.  

In the same moment, stocks are taking a dip and housing prices are going down as well.  So what should you do in this climate where the government’s handing out money and major purchases are now significantly cheaper?  Should you go on a spending spree or should you save for a rainy day?

It depends on one major thing: debt, specifically credit card debt. Let’s look at an example.  You put that money into a high-yield savings account or invest in a Treasury (something the administration sorely wants you to do).  A 10,000 investment or account is going to net you roughly $3000 in 10 years time.  

Let’s say you have $10,000 in credit card debt, which is an average amount for most consumers.  That debt with a sizable 14-20% APR is going to cost you above what you’d make on that Treasury.  The answer: you shouldn’t look at what an investment will bring in, but what debt will cost you.  If you avoid the interest payment on debt, this is an investment in itself.  Once the debt is paid off, any investment you make will pay off more handsomely. 

That said, this isn’t advocating that you pay off debt in place of saving or investing – just weighting your money towards paying off debt rather than investments, as high-interest debt is going to be so much more costly than the amount you’ll make on an investment.  You should always be looking to save and invest, but you should also be as aggressive as possible with paying down your high-interest debt.   

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