The average debt per Canadian consumer is $71,300. If you’re sick and tired of paying debt payments every single month, you may be considering other options, like selling investments.
So, should I sell my stocks to pay off my debt? There’s not an easy answer that works for everyone. It’s going to depend entirely on your specific situation. If you’re struggling, you may want to talk to a debt counselor. And hopefully, this article can help point you in the right direction.
Not All Investments are Created Equal
Especially in the eyes of the government and taxes. Depending on where your money is invested, you may pay hefty fines or taxes for withdrawing your money too early. This is the case for many retirement accounts.
If you’re considering pulling from a retirement account, it’s almost always a better idea to leave your money where it is.
But if you’re considering liquidating assets that are already more liquid, there’s a bit more wiggle room. These are assets like stocks or bonds rather than retirement accounts or real estate.
How Pressing is Your Debt?
For the most part, so long as you keep making timely payments, your debt isn’t too pressing. You go about your payments and even build your credit score while you’re at it. Getting those debts off your back faster would be the big driver in selling your investments.
But if you’re about to default on a loan, it may be worthwhile to sell some assets and preserve your credit. These vary on a case by case basis, so you should talk to a professional who can give you advice for your specific case.
The Interest Rates are Key
Before you sign up for a loan or line of credit, you should know the interest rate. Consumer credit is typically between 15% to 30%. But student loans and mortgages are significantly lower, and some payday loans can be as high as 400%.
But your investments are making you money too, and you should figure out the average interest rate you’re making on your investments. (Calculators like this can help.)
If your investments are making more money than the interest on your debt, it’s arguably best to leave them be.
But if you have high-interest rate debts that are dragging you down, it may be wise to sell less profitable investments and pay down your debts.
Pay Off High-Interest Rates First
Let’s say you have a credit card at 19% APR. You also have stocks that you’ve been seeing a nice return of 8%. That means for every dollar invested, you get 8 cents back.
Whereas with your credit card, for every dollar of debt, they charge 19 cents. As you can see, your stocks aren’t earning enough to cover your debt’s interest. In a case like this, you’d probably be better off selling your stocks to pay off your debt.
But let’s say you don’t have credit cards, just a student loan at 4.5% APR. That means for every dollar in debt, the company charges another 4 and a half cents.
That’s not a lot. And your stocks are doing well enough to cover the interest from your debts, and still earn money. In this case, it’s a good idea to leave your stocks where they are and come up with a different plan to pay off your debts.
Make Sure You Plan Your Money
Whenever you get paid, you should give each dollar a job. A budget will help you figure out where your money needs to go, and the best place to put it. Learning how to effectively budget can help you cut back on expenses, save money, and put extra cash towards your debts.
Once you build your budget, plan to build an emergency fund of at least $1000. This can help keep you from getting into more debt when (not if) an emergency arises. $1000 is typically enough to cover most major emergency expenses.
Once your emergency fund is in place, you can start to pour your money into paying off your debts. You can pay down your smallest first (the snowball method) or the one with the highest interest rate first (the avalanche method.)
The avalanche method will save you most in interest expenses in the long run. Many people need a quick win when they start their debt payment journey. In that case, the snowball method is effective.
Protect Your Investments
If you already have investments in stocks, bonds, or retirement accounts, you should do your best to preserve these at all costs. Good on your for investing your money wisely!
Often, it can be useful to pull your investments to pay off debt. But if you can come up with another plan, liquidating your assets shouldn’t be your first choice.
Should I Sell My Stocks? It Depends On Your Circumstances
If you’re wondering should I sell my stocks, it’s going to depend on your circumstances and your debt. Most importantly, look at your APR for your debts and pay attention to the interest your investments are bringing in.
If the interest rate on your debt is higher than the interest rate on your stocks, sell. If your stocks interest rate is higher than your debts, come up with a new plan to pay off your debts.
This is a general rule and each circumstance is completely different. Always talk to a professional about your financial concerns.
Want to get your finances under control? Learn how to set up a budget here.
