The best debt is no debt. When you find yourself with some hanging over your head, however, repayment is the best “investment” you can make.
Photo by Alan Cleaver.
The Simple Dollar, a financial and frugality blog, wants you to rethink the way you look at debt. Paying off debt you hold turns the rate of interest on that debt into a guaranteed investment. As long as you’re paying off the high-interest debt you’re essentially earning money by avoiding future fees.
Let’s look at an example. Let’s say I have a debt on a big furniture purchase that’s sitting there at 7%. Every extra payment you make on that debt is the equivalent of a 7% investment with no risk.
If you’re in the 28% tax bracket, in order to beat the debt repayment in a savings account, you’d have to find one earning 9.72%. Even an investment earning only long-term capital gains tax, you’d have to find a riskless investment that earned you 8.24% annually – not going to happen.
Check out the full article for additional examples and advice on why you shouldn’t inflate the value of “good” debt when considering your debt repayment plan. Have a financial tip to share? Let’s hear about it in the comments.
Looking at Debt Repayment as an Investment [The Simple Dollar]