Investments & Financial Planning
Should I sell my investments to pay off my nondeductible consumer debt ?
Answer:
Yes in most cases. Consumer debt can have onerous interest rates like 18% or higher. Thus you have to earn more than 18% tax-free to come out ahead, and that is quite unlikely to do without a significant amount of risk.
With an unleveraged investment such as a mutual fund, your investment return is limited to the amount invested. For example, if you invest $100,000, and it earns 11% then you earn $11,000.
However, with a leveraged investment such as a home or real estate investment, your investment return represents the gross return less the cost of the borrowed money.
For example, if you make a $100,000 down payment on a home costing $500,000 you would earn zero on the $100,000 and $12,000 on the borrowed amount of $400,000, assuming a 11% gross return less an interest expense of 8%.
With an unleveraged investment such as a mutual fund, your investment return is limited to the amount invested. For example, if you invest $100,000, and it earns 11% then you earn $11,000.
However, with a leveraged investment such as a home or real estate investment, your investment return represents the gross return less the cost of the borrowed money.
For example, if you make a $100,000 down payment on a home costing $500,000 you would earn zero on the $100,000 and $12,000 on the borrowed amount of $400,000, assuming a 11% gross return less an interest expense of 8%.
