A while back, a helpful Fool from our Credit Cards and Consumer Debt discussion board asked me why I would want to contribute to our retirement accounts while my family owed $60,000 to creditors.
It's a great question, and my answer is simple: I believe that I can earn more by investing than I can by paying off debt. I'll explain how in a minute. First, here's the latest tally for what we owe in credit card and home equity debt:
|
Creditor |
Balance |
|---|---|
|
Citibank fixed loan |
$12,548.97 |
|
Citibank revolving debt |
$1,224.76 |
|
Home equity line |
$42,478.01 |
|
TOTAL |
$56,251.74 |
We also owe $17,474.40 for the minivan we use to chauffeur our three kids back and forth to school, ballet, tae kwon do, and ... well, you get the picture.
Tale of the tape
I realize it isn't a pretty picture. There's no joy in owing more than $70,000 to creditors. Hence the question raised on the Credit Cards board: Why put up with it?
My answer demands some math. Let's begin with what we paid in interest on last month's balances:
|
Creditor |
Balance |
Interest paid |
Effective rate |
|---|---|---|---|
|
Citibank debt |
$13,878.58 |
$46.67 |
4.03% |
|
Home equity line |
$43,204.58 |
$273.43 |
7.59% |
|
Vehicle loan |
$17,949.59 |
$53.70 |
3.59% |
|
TOTAL |
$75,032.75 |
$373.80 |
5.98% |
I'll be the first to admit that it stinks to pay $373.80 for nothing. But an effective 5.98% annual interest rate -- arrived at by dividing the interest paid by the total balance, then multiplying the corresponding monthly interest rate by 12 -- isn't awful.
What's more, the interest on our largest loan -- the home equity line -- is tax-deductible. That puts yet another dent in our already-affordable effective interest rate. So even though I'd rather not be in debt at all, we're borrowing about as cheaply as anyone can.
Deciding to invest
Which brings me to our portfolio. I haven't always been the best investor, but last year, my picks produced double-digit returns. Had I invested more of our available cash, I would have easily crushed the market.
Not that I'll be able to do so every year. My 2006 winners included a 150% gain in three months in an options position in Apple
But I'm also schooled enough in the craft of investing to know that I shouldn't settle for subpar returns. My aim, like that of many of my Foolish colleagues, is 15% or better annual returns for life. Even if I fall short of that, at 12% annually -- which I consider well within reach -- I'd make twice as much in returns, percentagewise, as I'm paying in debt. Why liquidate investments that are capable of earning more than I pay in interest?
Follow the money
Look, I'm not out to rationalize my mistakes. I blew it big time by falling back into debt. But the debt we have, while massive, is manageable. Each month, my wife and I pour excess income into our highest-cost obligation. The effects of that "snowballing" are already being felt, and I'm confident that even as I keep investing, we'll pay off half of what we owe by year's end. Stay tuned.
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Fool contributor Tim Beyers thinks the helpful Fools who patrol the Credit Cards board are an inspiration. Tim owns shares of Akamai, a Rule Breakers pick. The Motley Fool's disclosure policy is only interested in earning interest.
