Suppose, for example, that you won $3,000 from a sweepstakes and had $3,000 in credit card debt. Which is preferable: investing, saving, or paying off credit card debt?
Clear your credit card debt. There’s an easy huge rate of return.
Annual percentage rate for credit card debt is more than 25%. 10% annual return on investment—IF YOU ARE VERY LUCKY. Pay down the debt in full first.
Delete the debt with a clean slate. From there, create a foundation.
In theory, if the return on your investment is higher than the interest rate on your loan, you could profit by investing the money and only making the minimum loan payments. However, this approach involves significant risk.
If your loan is a credit card, it’s unlikely that any investment would yield returns greater than the credit card’s borrowing costs, so it’s generally better to use the money to pay off the balance. If the credit card has a 0% interest rate for a year, you might consider waiting, but the potential gains from this strategy are probably minimal.
Do you have an emergency savings account? If not, allocate $1,000 for an emergency fund and use the remaining funds to settle debt. There will be an emergency reserve, so you won’t need to take on further debt.
I concur. Always start with setting aside money in your emergency fund to cover three months’ worth of rent. After that, take care of your high-interest debt before investing. This is the wealth creation hierarchy!