February 5, 2012 | In: Opinion
Should I Sell Stocks to Pay Off Debt?
Sometimes you’re in a dilemma, you have debt and you have stocks – selling your stocks might pay off your debt in full or it might lower your debt to a manageable level. But the question is, is it a good move? The answer is, it depends on the debt and it depends on the stocks:
If the debt is non-manageable
In this case, you should do your best to reduce your debt to a manageable level by using all the means possible, including selling all the stocks that you have. One buys stocks to make money and to protect himself from inflation, if your debt is causing you to bleed money, then you must dispose of all the stocks that you have in order to settle as much debt as possible. Additionally, if you have unmanageable debt, then most likely you’ll be making all the bad decisions about your trades (for example, sell when you should hold, and buy when you should sell) – this is because you’ll most likely be subject to fear, which is one of the two vices in stock trading.
Generally, you should sell anything that you have to reduce your debt to a manageable level. (PS: Writing this paragraph reminded when I was in my early twenties, and my father had a huge unmanageable debt, and I was opposed to selling one of my father’s estates. However, a bank adviser told me something that made me change my mind and accept to sell: “sell it now, and in the future you’ll have money and buy a better one“).
If the debt is manageable
The decision in this situation is a bit hard and may be the cause of a dilemma: “should I sell my stocks to pay off my debt” or “should I make more money on my stocks and settle my debt as initially planned”… That decision, however, could be simplified by reading the below:
- Was the debt accumulated to purchase your stocks?: In other words, does the debt consist of taking money from the bank just to buy stocks (or bonds)? If this is the case, then the interest on that debt is tax deductible, which will substantially reduce your effective interest rate on the money that you’ve borrowed. You may need to take that into consideration when making your decision.
- Does the debt solely consist of your mortgage?: Interest on mortgage is also tax deductible. So, if you settle your debt you will lower these tax deductions.
- Are you currently losing money on your stocks?: Remember that stock trading has its ups and downs (like any other form of trading), and if you’re losing money today, then it might not mean that you are going to lose money tomorrow. It’s better not to sell in this situation and wait until your stocks improve (except if your portfolio has no good stocks at all).
- Are you currently making money on your stocks?: If your stocks are in the green, then it’s better to sell part of them in order to settle part of your debt (especially if you took the money in order to trade stocks). Here’s what I do in this case: Every end of the month I check how much net money (after commissions and other fees) I made on my trades. Let’s say I made $5,000. I sell shares equivalent to half that amount ($2,500) and I take the money and settle some of my debts, that’s in addition to the monthly payment I owe to the bank. If, by the end of the month, I didn’t make any money or I lost money, then I only make the monthly payment. This will allow my investment in the stock market to grow, and will substantially decrease my debt and my interest rate over time.
It’s important to remember that, with the exception of the mortgage rate, all owing interest rates will increase with time (especially if the bank notices that you’re doing your best to settle your loan as fast as possible), so a debt that is currently manageable may not be manageable in a few months from now (Just for the records, TD Bank has increased my interest rate by 3.75% on one of my loans – in one shot! But that’s a different subject and I will definitely write more about it later).
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