3. Pay Off High-Interest Debt
Not all debt, though! Only high-interest debt. This is debt which has an interest rate higher than you could get by safely investing the money somewhere else. Since index funds historically yield about 7% or so, we're going to define high-interest debt to mean any debt with a rate over about 6%.
This category usually includes:
- Credit card debt (often 16%–18%),
- Especially usurious student loans (usually from private lenders),
- Parent PLUS loans, and
- Many personal or business loans.
It generally doesn't include:
- Most federal student loans,
- Car loans, or
- Home mortgages.
Check the details on your specific debts to be sure.