Our Recommended Broker

Get $50 in free trades.
Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max FAQs
Home
Disclaimer
Learning Topics
Contact Us
FAQ Archive

Why is paying off personal debt a good investment?

When you pay down personal debts such as your mortgage or credit card bills, you give yourself a large return on your money.

The reason is that interest on personal debts is paid with after-tax dollars. Paying off a personal loan charging 10% interest gives you the same effective after-tax return as an investment paying you 20%, if you are in the 50% tax bracket. If you decided to put money in an investment, instead of paying off that 10% loan, the investment would have to generate a 20% return just for you to break even overall. Many Canadians have personal loans at the same time that they have investments like GICs that pay fully-taxable interest. This does not make a lot of sense if the interest you pay on the loan is more than the interest you are paid on the investment. By paying off personal debt, you will also eliminate a drain on your cash flow and will free up money for more productive uses, such as investing. You should first pay off loans with the highest interest, since that will give you the greatest savings. If you keep your debt under control, you are better able to cope with any unexpected expenses or loss of income.