Always Conquer Debt First
The age old debate whether you should take your extra cash and put it in the stock market or pay off your loans is really not one you should bother contemplating, ever. There is only one answer.
Pay off your debt!
The psychological hurdle that a lot of people cannot overcome is the amount of money they are missing out on while they spend years becoming debt free. They see the news and read how the stock market has hit all time highs. They begin to feel like that unpopular kid at the school dance yearning for a piece of the action.
The problem is that succumbing to those feelings will put you in greater debt over time and you will never experience the wealth you think.
The S&P 500 is a stock index consisting of the 500 biggest companies in the United States. The index is used to measure the health of the economy. Since 1871, the S&P has grown on average 5.63% per year. You can easily assure yourself that your money in the stock market over a long period of time will compound at that rate. You can make a fortune.
Let's compare the S&P 500 compound rate to most other versions of debt. If you have average credit you could be looking at a 12-22% finance rate on your credit cards. Personal bank loans can easily go over 10%. Car loans are pretty low (usually less than 6%), but if you couple that with the rate the actual value of the car depreciates, you could be looking at a 15% per year decrease in your money. I even got my student loans lowered to a fixed 6% rate; still less than the average gain in the Fortune 500 companies.
What does all this tell you? Making the mistake to invest in the stock market before taking care of your debt is a not the way to go.
While you may make some money in the stock market, your debt amounts will increase much faster. Your net worth will plummet and you will be strapped to your job for many years than you hoped you would be.
The right answer is to just pay off your debts and give yourself an instant $2,000 per month raise. You can use that extra money to by even more equity in companies than you could if you were strapped down with minimum monthly payments.
As you start eliminating your liabilities and start building up your assets, you will begin to learn that debt is only worth it if it is used to increase your assets. An example of that is taking a private loan to renovate a home. You take a loan at 12% interest to flip a home where you will make 25% on your investment. This leaves you 13% of profit on top of your initial investment to add to your asset column.
Obviously, this is a more advanced way to look at debt. Today I want you to understand the concept of paying your debt BEFORE you invest. It is an essential concept to learn for your journey to financial freedom.