Should You Pay Off Debt Or Invest


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A frequently asked question..."Should I pay of debt or invest"

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Should You Pay Off Debt Or Invest

  1. 1. Ameriprise Financial Greg Younger, CRPC® 14755 N. Outer Chesterfield, MO 63017 636.534.2092 Should I invest my extra cash or use it to pay off debt? April 28, 2009
  2. 2. Ameriprise Financial Page 2 Should I invest my extra cash or use it to pay off debt? Question: Should I invest my extra cash or use it to pay off debt? Answer: To answer this question, you must decide how your money can work best for you. Compare the money you might earn on other investments with the money you would pay on your debt. If you would earn less on investments than you would pay on debts, you should pay off debt. Let's assume that you have $1,000 in a savings account that earns an annual rate of return of 4 percent. Meanwhile, your credit card balance of $1,000 incurs annual interest at a rate of 19 percent. Your savings account thus earns $40, while your credit card costs $190. Your annual net loss is 15 percent, or $150, the difference between what you earned on the savings account and what you paid in interest on the credit card balance. It's even worse when you consider the tax effect. The interest on the savings account is taxable, and you have to use after-tax dollars to pay your credit card bill. In this instance, it would be best to use your extra cash to pay down the high-interest debt balance. The same principle would apply if you were to invest your extra cash in a certificate of deposit (CD), mutual fund, or other investment. Now, let's look at another example. Say you have a student loan of $1,000 that you are repaying at an annual interest rate of 5 percent. Instead of paying off the debt, you invest $1,000 in a CD earning a 7 percent average rate of return. Here, your best strategy would be to keep the loan and invest the extra cash, because your net gain will be 2 percent annually, or $20--the difference between what you earned on the investment, less what you paid on the debt. See disclaimer on final page April 28, 2009
  3. 3. Page 3 Ameriprise Financial The information contained in this material is being provided for general education Greg Younger, CRPC® purposes and with the understanding that it is not intended to be used or interpreted 14755 N. Outer as specific legal, tax or investment advice. It does not address or account for your Chesterfield, MO 63017 individual investor circumstances. Investment decisions should always be made based on your specific financial needs and objectives, goals, time horizon and risk 636.534.2092 tolerance. The information contained in this communication, including attachments, may be provided to support the marketing of a particular product or service. You cannot rely on this to avoid tax penalties that may be imposed under the Internal Revenue Code. Consult your tax advisor or attorney regarding tax issues specific to your circumstances. Neither Ameriprise Financial Services, Inc. nor any of its employees or representatives are authorized to give legal or tax advice. You are encouraged to seek the guidance of your own personal legal or tax counsel. Ameriprise Financial Services, Inc. Member FINRA and SIPC. The information in this document is provided by a third party and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial Services, Inc. While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use or reliance upon this service. Prepared by Forefield Inc. Copyright 2009 Forefield Inc.