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To Pay Off Debts or Invest?

In: Business and Management

Submitted By jcsihay
Words 397
Pages 2
To Pay Off Debts or Invest?

Whenever you receive cash, whether it is from a debt collection or tax refund, you have several choices on what to do with the money. You have the choice of paying off debt, investing, or spending it. If you have extra money each month, it is wiser to pay off your debts first until you have paid most of it rather than saving it.

Basically, it is more advisable to pay off debts with high-interest rates rather than investing it and earn low interest rate or rate of return. You can compare and calculate the after-tax rate on your investments and debts, to be sure of whether you invest or pay off debt. If you are not using an interest-earning account for your investment, determine the investment’s after-tax return.

You can either use the Annual Percentage Rate as the effective rate if possible or use the stated interest rate for your credit card or auto loan payments. If you are paying off loans such as home equity or student loans, subtract your income tax bracket from 1.0.

For a clearer view, an example of this is: you belong in the 25% tax bracket, you would have 0.75 (1.0-0.25), then multiply it by your loan interest rate. The outcome will then be your after-tax rate on tax-deductible. The formula would be your 1.0 minus the tax bracket you belong times your loan interest rate. Ex: 1.0-0.25(tax bracket)*8% (loan interest) = 6% (after-tax interest rate).

It is really hard for you to pay off debts, especially when you miss out the opportunity of spending or investing the money. But by paying off high-interest debts first, you will see an improvement on your personal cash flow plus with the help of better budgeting and savings.

You can also pay off high-interest debts with payday loans. Payday loans have fixed charges so there is no need to worry about interests. The cash advance loan can have high fixed charges, but it can

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