Invest or Pay Debt?

in Debt Reduction

A very good question that most mutual Fund Salesman Financial Planners don’t always talk about, is it better to Invest or pay debt? (where invest usually means buy Mutual Funds for your RRSP or TFSA)

Let’s do some math ? Let’s give ourselves $500.00 that we FOUND (yeh, I wish I could find $500 too). Let’s look at what happens in our scenarios.

Invest in a Good Mutual Fund

Yes, I am not going to tell you what this is (but look at the Management Charges FIRST and we’ll talk about that another time as well), assume this mythical fund can pay 7.5% annual growth year over year (again, I have no idea if such a fund exists, I am only doing this for examples sake).

After 10 years our $500.00 will be worth 500 * (1.075)^9 = $958 or so (approximately) which means you made about $458 profit, good for you!

That’s not bad, especially if you have put it in an RRSP, so you have saved tax money too.

Put money on your Credit Card

Assuming you have a nice credit card company and they are only gouging you for say 14%, given for some bizarre reason you might carry this balance for 10 years (and if you have done this, let me kick you in the butt now.

$500 off your balance would save you 500*(1.14)^9 = $1625.00 or so, which means you have saved $1125.00 ! WOW!

KARUMBA!!!! Hey, I think you should put that money on your credit card, don’t you think?

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{ 2 comments }

{ 2 comments… add one }
  • Big Cajun Man April 29, 2005, 10:09 AM

    EXACTLY! Good point! Get out of DEBT first and FOREMOST!

    Now if I can just figure out how to get Nortel stock up to $35 a share then we’d be cooking!

    aw

    Reply
  • Canadian Capitalist April 29, 2005, 7:36 AM

    One more difference:
    You pay tax on any investment gains (even inside a retirement account, you have to eventually pay tax when withdrawn). If you save money on credit card interest, it is after tax savings.

    Reply

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