Paying Down Debt – The Good News

If you have money deposited in the bank, you know that interest rates are minuscule. Even the best online rates don't yield more than 1.5 or 2.0%.

However, paying down debt can potentially yield a risk-free, double-digit investment return. Psychologically, you should treat debt repayment as a tremendous investment. And while it may be less alluring for some than investing in the stock market, statistically you'd be far better off paring your debts since it is risk-free.

To reinforce this concept, suppose you have an extra $1,000 after setting up a "rainy day" fund in case you lose your income. If your debt is accruing interest at 10% annually, here are two options:

Invest $1,000 in the stock market

Hope for a 12% pre-tax rate of return

Pay long-term or short-term capital gains taxes

Net a 10% after-tax rate of return ($100 on the $1,000 investment)

Use the $100 in proceeds to offset $100 in additional interest
($1,000 debt * 10% annual interest)


Pay off $1,000 of debt

Same economic outcome as above

Equivalent to a 12% investment return, but without the risk of stock market fluctuations or downturns