So you have some spare cash-flow. What to do? One of the obvious options is to pay down your Bad Debt. Bad debt is what we refer to as debt that is not working for you, such as your mortgage, your credit card, personal loans, you get the idea. So let’s look at the returns from paying down debt as opposed to investing that same amount of money.
If we invested $10,000 @ 5% the return is $500. Now the lovely tax man will say he wants a slice of that $500, so it’s added to your taxable income. Assuming your marginal tax rate is 38.5% then the tax man takes $192.50 and you are left with $307.50.
If we look at the alternative, and you had a loan charging you 5% and paid the same $10,000 then the amount of interest you have saved is $500. The same. However the tax man is not a factor here as you are merely paying down debt.
As a matter of fact you would actually need an investment to make a return of just over 8% to equate to that same $500 return.
The moral of this it’s always a good idea to start getting rid of that bad debt, working from the highest rate (credit cards, personal loans) to the lowest (generally home mortgage). You need to look at potential returns of investments, and weigh that up against the interest rates of your debt.