Pay Off a Loan or Invest

When you have saved enough over and beyond your emergency savings fund, what should you do with additional funds? Should you pay off any outstanding debts no matter what interest rate it holds or should you drag it out as long as possible and use the money to invest? The answer lies largely in the interest rate you have to pay on your own, your skill level at obtaining a higher return than if you just paid off your loan, and your risk tolerance.

How’s it goin everybody this is pete the bush today we’re going to look at if you should actually pay off your loan if you have the cash on hand to completely pay off the loan this is of course money that you have on top of your emergency fund which is something that you can use to invest in or pay off a loan you can imagine if you should pay off the loan or not

Largely depends on the interest rate you have to pay on the loan the larger it is but easier it is to decide to just pay off that loan now what would you do with say $20,000 instead you can do various things with it such as invest in the new business you can invest it in an smp 500 index fund you can put it in bonds which has a little bit less risk than in the

Stock market you can also put it in a savings account which has only a 1% of interest rate right now all of these of course has a varying amount of risk and then varying amount of estimated average returns every year some of them have higher volatility and some of them have lower volatility you can imagine if you have a $20,000 student loan that’s charging you at

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2% interest however the current interest rate let’s say it’s 5% every single year this is risk-free money if you put that $20,000 in the bank you would get 5 percent risk-free every year even after subtracting for income tax you’re going to get about 2 percent on that $20,000 free and clear without any risk so it’s probably better to leave it in a savings account

In this scenario however it gets more complicated if the interest rate on your bank gets lower and lower to the point where the cost of the student loan completely equals out the interest that you earn and it might be better to just completely pay off the student loan just so that you don’t have to hold this in your mind and it frees your mind from thinking about

A student loan knowing that you completely paid off the student loan knowing that you won’t someday not be able to pay the student loan payment it’s a bit liberating and this might be in itself worth a few percentage of course you can take that 20k and invest it in bonds smp or do something better with it like real estate or something like that they get higher

Percentage than 2% so you can kind of think of this as barring from the bank at a 2% interest rate instead to do something else with it so you hope that you’re going to make more than 2% due to the high volatility you could hit a point where you only have $10,000 left in principle because the soft market dropped a lot and then you’re going to think oh my gosh i

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Could have fully paid off my student loan rather than try my look at investing so all in all no matter if it’s a credit card balance student loan balance or mortgage payment if you pay something fully off you sort of free yourself mentally from it for example if you pay your mortgage off you have a huge financial security there because you know you will not miss a

Single payment and somehow default on it and they’re going to kick you out of your home and you’ll be homeless if you’re looking at paying off a certain loan you really got to look at what you can do with that money instead of paying off that loan now some people might do better with that 20k by investing in a business maybe they’ll get 10 percent return 50 percent

Return or maybe they can invest in real estate soft market or whatnot you’ve got to know it has high risk sometimes it has medium risk sometimes and low risk sometimes of course usually the higher risk the higher reward so it really depends on if you’re comfortable with taking that money and not paying off a certain loan instead and using that to make more money

Over and beyond what’s the interest rate that you’re paying on the loan is sometimes in the stock trading account you can actually borrow money from it to buy socks borrowing that money there’s a certain interest rate involved with that so you are betting on that yes you can take that let’s say it’s 8% and you’re going to invest it in the stock market and you think

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That you’re going to make more than 8% borrowing on margin so if you make more than not yes you will make money but you’re taking a risk here so i hope this gets you thinking about if you should pay off a certain loan that you have as long as you have money on top of your emergency fund don’t forget to give me a like on this video comment down below let me know

If this helped you decide if you should completely pay off a certain own that you know you can pay off already if you’re interested in supporting this channel check out my audible link down in the video description below you can also support this channel directly through my patreon link over here and then as always don’t forget to subscribe thanks for watching

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Pay Off a Loan or Invest By BeatTheBush

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