Ask a Fool: Should I Pay Off Debt or Invest?

Q: I recently came into some money that I don’t need to cover my living expenses right now. Would I be better off paying down some debt I have or investing the money in stocks?

It depends what type of debt you're talking about. If the APR or interest rate you're paying on a particular type of debt is greater than the long-term returns you can realistically expect to get from your investments, paying down debt is a good idea. On the other hand, you're better off investing instead of paying down low-interest debt, at least from a mathematical perspective.

Continue Reading Below

Here's what I'm talking about. Over the long run, the annualized return of the overall stock market is around 9%-10%. So although there's no way to know for sure what the market will do, it's fair to expect this level of return from your portfolio if you stay invested for a period of a couple decades or longer.

If you have credit card debt at say, 20% interest, it's a good idea to go ahead and pay it off instead of investing. Most great investors don't consistently achieve returns like this.

On the other hand, if the debt you're referring to is a mortgage at 4% interest, or an auto loan at a similarly low APR, it's tough to justify paying it down early.

Of course, this is purely from a long-term expectation perspective that I say you'd be better off investing. If you simply don't want to be in debt anymore, that's another story.

Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*

Advertisement

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

*Stock Advisor returns as of Aug. 6, 2018.

The Motley Fool has a disclosure policy.

Source: Read Full Article