Should I pay off debt or invest? The 6% rule

A reader asked me last week: "I have $8,000 saved. Should I pay off my credit card or invest it?"

Her credit card was charging 19.9%. She was considering putting the money into an index fund hoping for "maybe 8% a year".

This is the most common money question in existence. And most advice makes it complicated. It isn't.

There's one number that decides it. 6%.

If your debt interest is above 6%, pay the debt first. Always. Because paying off debt is a guaranteed return equal to your interest rate. A 19.9% credit card means paying it off earns you 19.9% guaranteed. No market can beat a guaranteed 19.9%.

If your debt interest is below 6%, you can consider investing instead. A low-rate mortgage at 5% is below what the S&P 500 has historically returned long-term. So investing can make sense mathematically.

The number isn't arbitrary. 6% is roughly the long-term real return of a diversified index fund after inflation. It's the bar any debt needs to clear before investing makes sense.

Rule
Paying off high-interest debt is the highest guaranteed return you will ever get. Chase it before anything else.

Action for this week
Write down every debt you have and its interest rate. Circle any above 6%. Those get paid first, starting with the highest rate.

Next week
Why your "raise" disappeared before you even got paid.

Know someone stuck between debt and investing? Forward this.

P.S. This rule has saved readers more than any stock tip ever has. Boring beats brilliant.