Making monthly payments for a debt that never seems to come to a close can undoubtedly be frustrating. If you find yourself in such a scenario, you may be tempted to sell your investments to pay off your debt. Although, financially speaking, would this be the right move? Let’s look at a few factors that you should consider before selling your stocks to clear your debts:
Check Your Current Rate Of InterestBefore you sell your investments, ensure that you first check the current rate of interest on your outstanding debt. If you find that you are paying a high interest rate on your debt, it is probably wise to repay your debt in full so you have more disposable income.
Understand The Type Of DebtNot all debts need to be repaid immediately. If you have an outstanding debt for which you pay a low interest rate, as low rate mortgage, don’t be in a hurry to sell your investments and close the loan account. In fact, if you’ve been steadily repaying your low rate mortgage over a period of time, it could reflect positively on your credit score. On the other hand, if you have a credit card balance for which your lender charges you an exorbitant interest rate, it is wise to consider repaying such a debt in full.
Calculate The Returns On Your InvestmentWhat you want to do next is calculate the returns that you are likely to earn on your investments. If you do decide to sell your stocks to repay your debt, ensure that you sell the stock that has fetched you the lowest rate of interest, provided you won’t lose too much money when selling it.
Account For PenaltiesIf you make a profit on your stock and you sell it, you will need to pay capital gains. If you’ve held your investment for less than a year, you will need to pay short-term capital gains, while if you’ve held your investment for over a year, you will need to pay long-term capital gains. In most cases, you will likely l need to pay a heftier tax on short-term capital gains, in comparison to how much you will need to pay on long-term capital gains. With this in mind, it is smart to liquidate investments that you’ve held for a longer tenure.
Whether To Sell Or Not To Sell?Before you sell your stock to repay your debt, make sure to evaluate the cause of your debt. Your investments are meant to be held for a longer term so you can maximize the returns. If bad spending habits are the reason you are in debt, it would be wise to reevaluate your expenses and work out a suitable payment plan and leave your investments untouched. That said, if you know that you’d probably stand to gain more from repaying your debt in full than keeping your investment active, you can consider selling your stocks to free up enough money to repay your debt.