Unit 1 · Level 2 · Pay it off or invest it?
Guaranteed beats expected
A card charging 18% and a fund hoping for 8% both quote a percentage, but they are not the same kind of number. The 18% is a fact, written into a contract, charged whether the year is good or bad. The 8% is an average across decades, and a single year can land at plus 25% or minus 30%. Lining them up as if they were equal is how people talk themselves into the worse choice.
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What you get asked
Why is a certain 18% saved not directly comparable to a hoped-for 8% earned?
The card rate is promised to the lender. The market number is a long-run average nobody owes you. Adjusting for that difference is the whole comparison.
Your card charges 18% a year. A broad index fund has averaged about 8% a year over long periods. How many percentage points better is clearing the card?
18 - 8 = 10 percentage points, and the 10 is the conservative reading. The card side of that gap is certain, while the fund side is only an expectation.
Repaying debt is one of the few places an ordinary person can earn a ___ return, because the saved interest is written into the contract.
Nothing in a market pays a risk-free 18%. Repaying an 18% debt does, because you are removing a certain cost rather than chasing an uncertain gain.
Match each percentage to the kind of number it really is
Sort every percentage into certain or expected before you compare any two. Once they are sorted, most debt-or-invest questions answer themselves.
A friend says 'markets return 10%, so never repay a 12% loan early'. What is wrong with that?
Even ignoring the risk, 12 is bigger than 10. Add the risk and the gap widens. A bad market year still leaves the 12% loan charging full price. 🐜
The rest of this unit
The one decision that decides where every spare euro goes, and it turns on a comparison most people never make.