When you receive a windfall, such as an inheritance or unexpected cash, the decision to pay down high-interest debt or invest can significantly impact your financial future. The article discusses the financial implications of both choices, emphasizing the importance of reducing high-interest debt first. Here are the key points and insights from the article: 1. **Understanding Net Worth**: - Net worth is calculated as assets minus liabilities. If you have $30,000 in assets and $10,000 in credit card debt, your net worth is $20,000. - Receiving an additional $5,000 and using it to pay down debt reduces your liabilities, increasing your net worth. Similarly, investing the money increases your assets, also increasing your net worth. 2. **Interest Rates Matter**: - If you invest the $5,000 in a term deposit earning 3% interest, your net worth increases by $5,000 in assets, but you still have $10,000 in debt. Your net worth becomes $25,000. - If you use the $5,000 to pay down a 20% interest credit card debt, your liabilities reduce to $5,000, and your net worth also becomes $25,000. 3. **The Impact of High-Interest Debt**: - High-interest debt, such as credit card debt at 20%, can significantly reduce wealth over time. The article illustrates how a $1,000 debt at 20% can grow to over $5,000 in nine years if no payments are made. - Paying down high-interest debt is equivalent to earning a 20% return on investment, which is far better than the 3% return from a term deposit. 4. **Mortgages vs. Credit Card Debt**: - Mortgages are a different type of debt. While they carry interest, the interest rate is typically much lower than credit card rates. Additionally, the asset (a house) often appreciates in value over time. - However, it's still beneficial to pay off mortgages as quickly as possible to reduce interest costs and increase equity. 5. **Financial Wisdom**: - The article highlights the importance of financial literacy and the dangers of living beyond one's means. It references 'The Millionaire Next Door' to illustrate that true wealth is often built through frugality and prudent debt management. 6. **Practical Advice**: - If you have high-interest debt, it's a no-brainer to pay it down first. This action is equivalent to earning a high return on investment without any risk. - After eliminating high-interest debt, consider investing to grow your wealth further. **Conclusion**: - Paying down credit card debt is a more effective use of a windfall than investing in low-yield assets like term deposits. The high interest on credit cards can quickly erode wealth, making it crucial to eliminate this debt first. Once this is done, the focus can shift to investing to build long-term wealth. The article emphasizes the importance of understanding net worth and the impact of interest rates in making informed financial decisions.