Unit 1 · Level 2 · Pay it off or invest it?
The hurdle rate
Every spare euro has one job to choose from. It can pay down a debt, or it can be invested. Clearing a debt that charges 19% saves you 19% a year, every year, with no doubt attached. That saved interest is a return. It just arrives as a bill that never comes. So before you send money into any market, look at what your debt is already paying you.
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What you get asked
Your card charges 19% a year. You have €1,000 spare and you use it to clear the balance. What did that €1,000 earn?
Interest you avoid is worth exactly as much as interest you earn. Clearing a 19% debt is a 19% return, and it is the rarest kind: one nobody can take back.
You owe €2,000 on a card charging 21% a year. You clear it today. Roughly how much interest do you avoid over the next twelve months?
€2,000 × 21% = €420. That is €420 you keep without picking a single investment, without a single good year in markets, and without any chance of it going the other way.
The interest rate on your debt is the ___ that an investment has to clear before it deserves your spare money.
A hurdle rate is the minimum return worth accepting. Your most expensive debt sets it for you. If an investment cannot plausibly beat that bar, the debt has first claim.
Match each debt to the yearly return that clearing it hands you
The rate on the debt is the return on repaying it. Notice how wide the range is. A 22% card and a 0% loan sit at opposite ends of it, even though one word covers both.
A fund is expected to return about 7% a year. Your card debt costs 19%. Where does the next spare euro belong?
Investing at 7% while paying 19% is running backwards by 12 points a year. Clear the hurdle first. The market will still be there when the card is empty. 🐜
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.