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.
You strategy has been working well so far- but the stock market run won't continue forever.
If you money wasn't already invested I would lean towards paying off your debt. Since you are invested - if you can keep the balance transfer going you might as well keep things invested. It doesn't take too many 15% years to offset the 3% balance transfer fees you are paying.
Here is the big BUT- you should still look for ways to pay down this debt. Pay more than the minium- use this as a chance to get ahead and build wealth rather than just treading water.
Make sure you are doing other things like minimizing taxes and getting your employer match on the 401k etc. Check out this post 10 Great Reasons to Ignore Retirement Planning
Assuming the market will continue to return at least 3% annually, you could come out ahead by continuing to pay balance transfer fees and keep your money invested. Although the market has had positive returns for the past several years, there is no guarantee that positive returns will continue. Long-term stock market returns should continue above 3%, but short-term returns are unpredictable. Interest rates can and will change over time also, so the 3% balance transfer fees may not continue. Your strategy is not quite as failproof as it seems.
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.
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.
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.