Should I pay off my credit card debt or invest my cash?
I have a $10,000 credit card bill and $10,000 to pay it off. However, I've been doing balance transfers for the past couple years at 3% ($300) and have my $10,000 in the stock market/mutual funds. These bring a return of 15% or so, and common sense tells me that this is the right move. My credit score is around 820 and I pay the monthly minimum every month. I guess I'm looking for validation because they estimate the market to hit $26,000 by next year.
Yes, definitely pay off your credit card bill. As you probably know, the interest on credit card balances is usually excessively high, quite possibly over 20%. So if you're paying ony the minimum each month, you're hurting yourself and it will take a very long time to get down to zero.
The fact that you've had a return of 15% or so in the past is no guarantee that you will continue to be so fortunate in the future. Indeed, given the richness of current market valuations I think it's quite likely that returns over the next few years won't get above single digits. Whoever thinks the market will hit 26,000 next year is spending too much time in FantasyLand. Although it's possible that the current rally may be extended, that will almost certainly lead to a substantial correction. Please do keep that in mind.
The best course of action is to reduce your debts and take a more moderate view of prospective returns on your investments. By doing so, you will be better prepared for the inevitable ups and downs that lie ahead.
Would you buy a mutual fund with your credit card? Paying off debt should always be your priority. It sounds like you are paying interest on your credit card bill. Some balance transfers offer 0% for a limited time with a good credit score but if you do not follow their rules and slip on the payments you could incur significant interest payments. That is great that your mutual fund has been returning 15% although past performance is never a guarantee of future returns. The fact that you are questioning whether you should pay off your credit card versus investing your cash is your indicator and you have already answered your own question by doubting your current strategy. Reduce your debt and possibly take some profits. Paying interest on a credit card is never a good strategy.
How would you feel if instead of hitting 26,000, the Dow (23,329 as I write) went to 21,000? Would you panic and sell? I see in your question a fallacy -- that is, you are claiming to be better off paying 3% on borrowed capital because you are sure you will get 15% on it. Don't be so sure.
The $10,000 in question doesn't exist in a vacuum. Surely you have a lot more savings than just $10,000. (Right?) Surely also you are in a position to pay off the $10,000 relatively quickly -- I say this because you have excellent credit so I am assuming you have a good income.
Make a plan to pay off your credit card in four months, using excess from your paycheck. Then, NEVER RUN A CREDIT CARD BALANCE AGAIN. Ever! Pay it off in full every month. Then, you can leave your investments in the market -- we could go to 26,000 after all -- and after four months you will be in the habit of saving $2,500 per month. Continue. Put it away into savings. "Pay yourself" along with all the other monthly bills. Stop using that credit card so much. And if you can really put away $30,000 per year into invested savings, think how secure you will be when you retire. Do yourself a favor and do it.
General rule of thumb is if your investments can earn more than your debts, maybe you keep some of the debt. Check the interest rate on your credit card, if it is anything in the double-digits, mid-teens or higher, then pay it off. When one pays off debt, say that debt has an interest rate of 12%, it is like you have just 'earned' 12% on your money. Hope this helps out.
In general, if your debts are at a lower rate than what you can get in the market, it's mathematically better to keep the debt and let your money keep working.
The unfortunate thing though is the returns you're mentioning are not guaranteed. If you truly believe the 15% will continue then the math is easy. However, how does your perception/strategy change if the market goes down 15% next year?
If you have a long-term plan for paying off the debt while continuing to invest then stick to that. But to look at is on a month-to-month or even year-to-year basis is a difficult proposition with the fundamental volatility in the market.