This invest in your debt calculator will show you why paying off debt is the safest and best way to invest money. But before you start plugging in the numbers, let's first make sure you are fully aware of all of the factors that need to be considered.
Contrary to what most "financial experts" will tell you, when it comes to deciding whether to invest or pay off debt, it's not simply a matter of calculating the "financial" return on investment. Because in order to make the best decision, you must also take the emotional return on investment into consideration.
If you choose to invest your money you will open yourself up to all the fear, worry and anxiety that comes from the very real possibility that some world event (9/11, financial market meltdown, etc.) might cause the value of your investments to plummet. On the other hand, if you choose to pay down your debts you will actually experience the opposite -- less fear, less worry, less anxiety and more peace of mind.
So why isn't anyone trying to sell you on investing in your debt? Because ...
When you purchase a traditional investment, someone gets paid a commission for selling it to you. Worse yet, if you go with a full service broker, you get to pay recurring account management fees -- regardless of whether your investment makes or loses money. Now there's a major conflict of interest for you.
On the other side of the coin, when you pay down your bills, you don't have to pay any commissions or account management fees, and the returns on your investment are guaranteed!
So with that, let's use the invest in your debt calculator to crunch the numbers.
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Balance Owed: This is the amount you owe to your creditor. For revolving charge accounts, this figure can usually be found on the statement you receive each month.
Interest Rate: This is the fee lenders charge for renting their money. The actual dollar amount the lender is charging you depends on how often the fee is calculated (compounded). Interest on loans is usually calculated monthly (annual rate divided by 12 months, multiplied by the principal). Revolving charge accounts typically calculate the interest on a daily basis (annual rate divided by 365, multiplied by the average daily balance).
Monthly Payment: The amount you are required to pay your creditor each month. This can either be a fixed amount, or it can be an ever-changing minimum amount (grows as your balance increases, shrinks as your balance decreases).
Tax Bracket: The IRS puts you in a certain marginal tax bracket depending on your filing status and your household's annual income. At last check, the tax brackets were 10%, 15%, 25%, 28%, 33%, or 35%. I'll be adding a tax bracket calculator to the site in the near future to help you quickly determine your bracket. In the meantime, please visit the IRS website and download the latest tax guide.
Lump Sum Investment: This refers to making a larger, single, upfront investment purchase, versus making smaller, periodic purchases or deposits.
Return on Investment (ROI): This is the money you earn from your investments and savings accounts, and can either be expressed as a percentage or as a dollar amount. Again, just like an interest rate, your actual return on investment depends on how often it is calculated (daily, monthly, annually, etc.).