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Originally Posted by LuxurySportCoupe
I'm 25 years old and just purchased my first home. I've got a 15 year mortgage on it (3.25% interest), but I've got enough money left over every month to put extra toward the principle, and get it paid off in 6 years or so. Would it be a better idea to take that chunk of money every month, and invest it in a bunch of "steady eddies" to put my money to work for me, instead of just giving it to the bank?
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The way I look at it if you have tax deferred savings, yes, otherwise no. Tax deferred, like 401k and IRA allow your money to grow without incurring taxes on the gains every year. Taxes eat into your gains. If the stock value increases you do not have tax liability until you sell. Dividends, on the other hand, are income. And, in the beginning, it is taxed like regular income. Long term gains are taxed at the capital gains rate. My brokerage account keeps track of it for me and sends me the appropriate tax documents. The taxes can get complicated, but suffice it to say it reduces your overall gains.
Long story short, I am currently paying into my 401k 1st, debt 2nd, and then when the debt is down I will put money into the brokerage account again. Reason is the taxes on the gains of the brokerage account for "steady eddie" type investments make the return not worth it compared to the cost of the debt.
If you have goals that require you to zero your debt before you move on, then at the very least add into your 401k (if you have one) at least as much as the employer matches (if this applies to you). I take issue with turning away "free" money if your employer has such a program. Assuming you are not self employed - which in that case I am mostly envious of your position.