Ramit Sethi breaks down when to pay debt versus invest: low-rate student loans around 3% can wait while you invest, but credit-card debt above 8-14% should go first. Call your creditors to negotiate lower rates or payment plans, then figure out why you're running up balances so it doesn't happen again.
So first of all, I will say that when it comes to paying off debt versus investing, a very, very simple way to look at it is your interest rate. If you have student loans at 3% and the average for the stock market over the last 70 years has been about 8%, well, that's very clear. You probably want to pay the minimums on your student loans and invest the rest. Okay. However, most people don't have interest rates of 3%. They have more like 6% or even 14% for credit cards. If it's 6%, that's a lot touchier. You're not really sure what to do because, you know, 6%, 8%. You get virtually the same returns if you invest or pay off your debt. Frankly, for most people, I would just recommend they actually pay off their debt or split it half and half. The reason I would suggest half and half is that you can get compounding effects if you actually put your money and start early. However, if you have an interest rate that's above 8%, like a 14% credit card or 21%, you've got to pay that off. Now, here's the thing that most people don't think about. Well, first of all, there are a few problems when it comes to debt. It's overwhelming. People who get debt on one card tend to get it on multiple cards. And you're just afraid to sit down and actually figure out what you can do and how much debt you actually owe. So this is step one. Make your credit cards do the work for you. Call them up and ask them to tell you exactly how much debt you have. What's your interest rate? Right. And then write that down for each of them. When it comes to, you want to get that all together and you want to kind of think about, okay, what do I need to do now? Because it's a tough time. You can call your credit cards. And this is step two. Most people forget and tell them, look, I can't pay this debt off. I would like to negotiate a way. I want to pay this debt off. I can't pay this much. So let's find a way to make this work. And when you negotiate, this is really important. Too many people try to be adversarial about negotiation. Well, I'm not going to do that. Well, no, I'll just not pay. All right. If you get angry in a negotiation like that, you have lost. A negotiation is cooperative. Hey, you know that I have $25,000 in debt on this credit card. You know that I also can't pay that much. So let's figure out a way to make this work. I want to pay you some amount, but I just can't get you the whole way through. Negotiation is cooperative, okay? And with that, you can actually lower your debts by thousands. And I have tons and tons of comments on my site from people who tell me they called up their credit card, they negotiated a settlement amount, and they were able to pay it off. So I want you to do that before you do anything else. Here's the problem. Also, if you got into credit card debt, you'll tend to do it again. And it's really important to figure out why you got into it in the first place, because there's a lot of people who take out, like, home mortgage loans to pay off their credit card, which, if you watch Suze Orman, you know, she goes crazy. I love her. She goes crazy because she points out, correctly, that people who tend to get in credit card debt once will do it again. And then if you use your 401k or your home loan, you can have those things taken away from you. If you got into credit card debt, chances are good you'll do it again. You need to understand the root cause.
