Everything I’m about to tell you, you already know. But sometimes seeing things on paper help them sink in better.
So let’s test your financial smarts. (I bet you’ll get both right.)
1. If your portfolio makes you 10% a year and your mortgage costs you 3% a year, will you make more or less money by using your portfolio to pay off your mortgage?
2. If your savings account makes you 0.5% a year and your credit card costs you 20% a year, will you make more or less money by using your savings account to pay off your credit cards?
Answer key:
1. Less
2. More
Now I understand there could be other factors at work, like managing your cash flow, but we’re not talking about those. This is purely from a money-making perspective.
Think of the interest rate on your debt as it’s rate of return.
Paying off your 3% mortgage guarantees you earn a 3% rate of return on the money you used to pay if off.
And paying off your 20% credit cards guarantees you earn a 20% rate of return on the money you used to pay it off.
Making smart investment decisions is simply a matter of comparing the rates of return and choosing the higher one.
