Invest? Borrow? Why Not Both?

Free Money Finance had a "Help A Reader" post the other day with an email from a woman asking if folks thought it was a good idea to take money out of her mutual funds to  pay off $24K in credit card debt.

The broad consensus from commenters on the post was yes, cash out the mutual funds and pay off the cards, C Cards 2 (Andres Rueda)provided those funds are not inside an IRA or something similar. Okay, fine.

A few commenters obliquely approached the core craziness here by asking if the reader would have borrowed money on her credit cards to invest in the mutual funds. Of course that sounds like a really loopy idea, and of course that is what she (effectively) did.

Not paying off a credit card or other high-interest consumer debt so you can save or invest is, or at least should be, an intuitively bad move. The returns on the investments are unlikely even to approach the cost of borrowing the money.

Nevertheless, I am quite certain that this situation that ought never to happen, substantial investments offset by substantial credit card debt, is fairly common. About half of American households own stocks directly or through mutual funds. And a little less than half of households carry balances on credit cards. In theory, there could be no overlap between those groups, but we all know better than that, don’t we?

And then there is my nomination for most disturbing statistic about American consumers: 80% of car purchases are financed.

There is some powerful psychology at work here. Nobody makes long-term plans to go into credit card debt. You charge a little more than budgeted one month, and then add to it the next, and before you know it you’ve got a high interest loan to pay off. Or not.

For many people, it is more upsetting to tap savings to pay off consumer debt than to carry consumer debt. Especially for something as amorphous and fluid as a credit card balance, it is almost as if until you write a big check to pay it off it does not fully exist. It is like how losses on stocks that are down are "only paper losses" until you actually sell them. (Which is equally as illogical, BTW.)

Drawing from savings can seem like an act of surrender, a collapse in the willpower that got that money saved to begin with. And moving money from the long-term savings bucket to the short-term credit card bucket violates the mental accounting rules we all use to deal with money. It is similar to the problems we have with cell phone contracts.

But if the savings was accumulated while the credit card balance was run up, then the feeling of willpower was a false one. A person would have been better off not saving and not borrowing as much.

I do not know of any givers of personal finance advice who tell people to save and at the same time incur debt, or even fail to pay off existing debt. Dave Ramsey, for example, is rigid in his insistence that a person should eliminate all non-mortgage debt before investing in the stock market. Suze Orman is a little fuzzy on the edges, advising against borrowing from a 401k to pay off credit cards, for example, but as far as I know she has never gone so far as to tell people to start investing while they still owe.

Yet in a larger sense, I still blame the gurus and others in the personal finance establishment. The oft-repeated mantra is "save more" not "increase your net worth." Saving is, generally, a good thing, but it is increasing net worth that is the point of the exercise. If that big picture perspective is not carefully explained first, what is meant by "save more" can easily be lost. And in their haste to simplify the complex into the easily digestible and palatable, the gurus tend to skip the big-picture part.

[Photo: Andres Rueda]

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