In the debate on whether to pay down debt or use your money to invest, most financial advisers would suggest that any gains you make on your investments would be undone by interest payments, particularly high interest payments like credit cards. They will typically recommend paying down your debt first and then investing. Mathematically, it can be demonstrated that interests costs would eat into your investment gains.
Something has never sat right with me regarding this concept. Certainly, if you do not have any savings, you aren't going to see much of a return. However, assuming that your savings is ten times your credit card debt and earns only one fourth of the interest rate that your credit cards charge. Essentially, your investments would be paying for your credit card interest and have money left over.
I have to think that the generic advice is for people who are just starting out on their financial journey. Unfortunately, the vast majority of people have credit card debt and very little savings. For them, paying down the debt will set them up to better be able to invest their free cash flow, if they don't spend it first.
Alternatively, somebody who has invested heavily in assets that produce income, such as dividend paying stocks, crypto that is paying interest, or rental properties, is much better positioned to go against that advice. Clearly, the better solution is to increase your income. With higher income, you can pay cash for things instead of buying on credit. Higher income also allows you to invest more money. Yet you hardly ever hear financial advisors tell people to invest heavily in things that generate income.
I reflect on this because I am in a situation where I am trying to decide whether to keep buying cryptocurrencies, which are currently paying between 6 to 18% interest over at crypto.com, or paying down debts. I have managed to zero out some credit cards. Thus, there is a bit more cash available to put away in savings, which will pay interest that gets compounded.
At the moment, I have enough free cash flow to pay down debt AND invest into crypto at the same time. In this way, my debt is shrinking and my income is increasing simultaneously. Still, I have moments of doubt and can't help but wonder if I am doing the right thing. In the long-run, having income producing assets will be a blessing when retirement rolls around. My pension estimates and social security benefits aren't exactly exciting. I would like to have assets that are producing income today and when I retire. In the process, I will be eliminating debt if only to reduce the overall volume of interest. The goal is to keep as much of my earned income as possible between now and retirement for the ultimate purpose of using it to continue to generate income.
My problem is that I am smart enough to sense what is good for me; but, I lack the skill to figure out if my intuition is mathematically sound.
Posted Using LeoFinance