Chapter 8. Determine Whether to Pay Down Debt or Invest

"If I have a mortgage, am I better off paying it down as soon as I possibly can, or should I use that money to invest in the market instead?"

One of my neighbors asked me that question a few years ago, and I instantly knew that the topic would strike a chord with the readers of my column on

After all, the shelves of your local bookstore are full of tomes that coach consumers on how to get the credit card monkey off their backs, and there's universal agreement that if you're carrying a balance on your credit card, the best thing that you can possibly do is get rid of it as soon as possible. The mortgage crisis also provided countless examples that taking on more mortgage-related debt than you can afford is a one-way ticket to financial ruin.

But other types of debt, such as a manageable mortgage, home equity-related debt, and student loans, occupy an underanalyzed middle ground. Interest rates on these types of debt are often substantially lower than credit card rates, and that interest may, in some cases, be tax-deductible. For those reasons, it's worth analyzing whether the aggressive paydown of that debt is the best use of your money or whether you should invest in the market.

Ultimately, it's a truly personal decision that's affected as much by your own personality as it is by math. I know several financially savvy individuals, including some of my Morningstar colleagues, who prioritized paying down their mortgages ...

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