Read this Article about twentysomethings: invest or pay off debt?
March 29, 2006 by Erik Folgate
Filed under Credit and Debt, Investing, Random
This article sums up my kicking and screaming about the priorities young people should have with personal finance. You MUST pay off your debt before you start heavily investing. Think of it like this, if you have $10,000 in debt at an interest rate of 10%, and you have $10,000 in a mutual fund making 10%, what is your annual net return? NOTHING, nada, zilch. Read this article from USA today. It’s a great one. Twentysomethings have the power to change the world when it comes to personal finance, but it must start with our consumption habits.ÂÂ
$10k paying 10% in debt is not the same as $10k in mutual fund earning 10%. You must compare post-tax rates of return. Someone in the 25% tax bracket would need to earn 25% more in the mutual fund (12.5%) to make his/her returns equal to paying 10% on debt, assuming that the debt is not tax-deductible (mortgage, college).
Good sentiment, though!