Which Is More Profitable: Investing In Stocks Or Paying Off Debts?

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Question: I’m constantly trying to save money, but now my husband says we should “spend money to make money.” He says the stock market is going so great, we should invest. But we have two car loans and a $3,000 balance on our credit cards. I want to pay those off first, but he says we’re missing out on a big opportunity, and that the stock market is how people get rich.

I’ve stalled him by saying we’d ask an expert first. I chose you as that expert. What do you think?

— Rebecca in New Mexico

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Every time the stock market rises, so do the number of questions just like yours, Rebecca.

In the past, I’ve been asked if savings should be put into the stock market. I’ve even been asked if an inheritance should be invested in the stock market.

The answer in both cases depended on the same question: Do you have a lot of debt?

It’s purely a numbers game, but I definitely understand the emotional allure of a bull market, where everyone else seems to be raking in dollars by the wheelbarrow load. Of course, that’s not true — because dollars someone “wins” means there’s a dollar someone “lost.”

It doesn’t add up

Let’s look at the numbers…

  • The average car loan has an interest rate of just over 4.5 percent, according to Bankrate.
  • The average credit card interest rate is over 16 percent, according to creditcards.com.
  • The average stock market return between 1966 and 2015 was just under 9.7 percent, according to The Motley Fool.

So you can see, if you stick to the averages, it makes little sense to play the stock market in hopes of scoring a fortune. You’ll have more money at the end of the day if you use extra cash to pay down debts that are charging you interest.

If your husband thinks he can play the market better than the average, he might as well play the lottery. That’s because investing in single stocks hoping to “beat the market” is tough to do and almost impossible to maintain. Why? Because he’s competing with investment professionals who do this for a living and have access to data he doesn’t.

Even those professionals have been under stress lately, as the market has pulled back as I’m writing this. It will surely rebound, but when? And in what sectors? The stock market isn’t one entity. The New York Stock Exchange alone trades stocks for 2,800 companies.

Conclusion

I totally agree with you over your husband, Rebecca. At least pay off your credit cards, if you can. If you can’t, consult a nonprofit credit counseling agency for a free debt analysis.

Once you’ve saved enough to invest, start small. Don’t choose individual stocks. In fact, you may want to invest more into a workplace retirement account or an IRA to get comfortable with how investing works.

Whatever you do, realize the stock market isn’t a get-rich-quick scheme. Done rashly, it’s a great way to lose money quickly.

Read more on our website…

Originally published at www.debt.com on May 2, 2018.

Debt.com helps people with credit card debt, tax debt, student loans debt, credit report errors, ID theft issues, bankruptcy & more!

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