Personal Finance

Q&A: What debt should I *not* pay off early?

Debt often comes down to personal preferences/beliefs, but from a financial perspective, cheap debt can be kept (and even should be in most cases). By “cheap debt”, I mean debt that has a low interest rate (the cost of borrowing), which, in the current environment, would be anything lower than 4%.

Real-life Application: Person A is in a solid financial position; their monthly income exceeds their expenses and the only debt they have is a mortgage that has an annual interest rate of 3% and a balance of $100,000. A relative of theirs recently died and Person A was a beneficiary (or recipient) of $100,000. Person A considers using all of it to pay off their mortgage; should they?
Assuming their personal goals don’t contradict my answer, I would say no and that they should invest it instead. For reference, the S&P 500 has had an average annual return of 8.9% over the last 30 years (1980-2019). If this continues, Person A could invest the inheritance and achieve a 5.9% (8.9% – 3%) higher annual return than if they paid the mortgage off.

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