DO NOT INVEST IF YOU HAVE CREDIT CARD DEBT!
It makes absolutely no sense to invest in the stock market if you have credit card debt. Credit card debt is typically in the 19-24% interest range (creditCardInterest). The stock market has historically returned 9.9% (stockReturn). So you’re paying 19-24% in interest to acquire 9.9% in returns. That’s bad. That means you’re losing money.
Let’s lose the percentages for a second and just use regular dollar amounts. If you were a taxi cab driver would you accept $9.90 in fare for a ride that will cost you $20 in gas? I’d hope not. Well that’s what you’re doing if you are holding credit card debt and investing in the stock market. You’re paying $20 to borrow $100, so you can turn around and earn $9.90 on that $100.
Now, of course you could beat the odds and earn greater than 20% in the stock market. But you could also lose money too. And there’s nothing worse then losing money you didn’t have to begin with.
This concept is similar to how a business needs to earn a higher Return on Invested Capital than its Weighted Average Cost of Capital (Discount Rate link). In other words, if a company pays 5% interest on its debt (capital), then it better earn more than 5% on its capital. If a company is earning less than their interest expense, then they’re in big trouble.
Written in 2015
1. Warning
2. Emergency Fund
3. Credit Card Debt
4. Employer Matched Retirement Funds
5. Other Debt
6. Time Horizon
7. Index Funds
Podcast: Investing 100