June 17th, 2009 by
PK

If you come into a fair amount of money, don't ignore the fact that you can invest in your debt.

Sometimes paying down debt can save you much more money than you can earn with another option.  Additionally, paying off a loan in full will increase your future cash flow.  Read on for a look at debt as an investment and a closer look at tax-equivalent yield.

## Pay it Down and Invest in Your Debt

In past articles, I didn't mention another option for your cash- paying down your debt.  Household debt in the United States is still at a very high level (even after recent improvements).  You probably have some debt yourself between credit cards, student loans, mortgages and home equity loans, and car loans.  What's worth paying off?

## More Tax Equivalent Yields

Say you just took out a car loan for $20,000 at 5.00% APY (make this math a little easier...) over 5 years. "5%?", you say, "I can make 7% in my sleep on the stock market..." (or any other investment route). Well, that's pretty confident, but you need to compare equals. Say you make$50,000 a year and you live in California.  You're paying 25% in federal taxes and 9.55% in California taxes for short term capital gains.

5.0% / (100% - 34.55%) = .05 / .6545 = .07639 = 7.639% tax equivalent yield.

How about for a long term gain?  In that case you would pay 15% in federal taxes and 9.55% to California.

5.0% / (100% - 24.55%) = .05 / .7545 = .06627 = 6.627% tax equivalent yield.

## Get to it!

Before you decide what to do with your money, at least take a cursory glance at the numbers if you invest in your debt.  You may find an opportunity where you didn't expect it.

### PK

PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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