SHOULD YOU PAY OFF YOUR DEBT OR INVEST?
When making a decision about either paying off your debt or investing most people end up choosing the first option. Even though paying off debt will allow you less stress - which is why it is the most popular choice - not always will it be the best one. .
The first numbers one should look at are the investment’s after-tax return (do not ever forget the taxes!) and the after-tax cost of debt. Since part of the interest paid on some kinds of loans can be tax deductible, you might be actually paying 4.5% interest a year after-tax on a fixed 6% mortgage rate. .
The opposite happens with investments. You might earn an overall 6% profit on a short-term investment and, after taxes, end up with only 4.5% being deposited on your bank account. Therefore, if the amount of return after taxes on your investment is higher than the amount of after-tax interest you pay on your debt, you should invest. .
Minor aspects when making that decision are your age and how diversified your portfolio is. If you are younger, your risk tolerance will lead you to more aggressive investments, making your returns probably higher than the cost of your debt. If you are older, your portfolio might be more conservative, which brings lower profits and increases the importance of lowering debt. .
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