Should you sell stock to pay credit card debt?

Date: Mon Jan 04 2021 ; Tags: Personal Finance »»»» Credit

Suppose you've got a zillion dollars in credit card debt, and you've got some stock in your investment account that equals a large chunk of the debt. What do you do? If you sell the stock it'll speed up your debt repayment plan by a whole lot. What do you do?

Well, "it depends" on your circumstances.

For the record I sold $12,000 worth of Microsoft stock towards the end of my debt repayment plan. In one fell swoop that nearly paid off my debt and enabled me to reach an ambitious debt payment goal. It also released a nagging worry from me, since I greatly disapprove of Microsoft and it bothered me to own their stock. But lets get back to the general story here.

By the way, before this goes much further, I'm talking about any asset on this page, not just stock.

The first consideration: debt repayment speed

Your credit card debt is probably costing you 20% in interest. Stocks on average grow at 11% a year. So, on average, you're coming out a loser by holding the investment and paying interest. The picture is even worse with other kinds of assets, because not all assets grow in value. For example, most cars diminish in value.

By the numbers you would pay off the debt more quickly by selling the asset, paying off the debt. Ideally you'll then go into savings mode with an immediate goal to replace the invemestment.

However, it's not that simple

Life is rarely that simple, as we have an irrational nature to us which can override rationally thought out plans.

A good question to ponder is: How did you get into debt in the first place? and Have you learned your lesson?

If you sell the asset and magically pay off the debt, then what? Will you just keep up the habits which created the debt in the first place? If you keep those habits going you're likely to just end up in debt again, but the second time around you won't have the assets to fall back on. Hmmm... maybe you should keep the asset after all?

Sound financial footing

If you've read my other personal finance pages, you know I'm a big fan of creating sound financial footing. Having sound finances gives you much more life flexibility than unsound finances.

Having run up a large amount of debt often indicates unsound financial practices. Specifically, it usually means you've spent lots of money on credit cards and paid the minimums. If you just pay the minimum payment, you're unlikely to ever pay off your credit cards. That's probably why the credit card companies set up the minimums that low, to entice you into a pattern where they're always sucking money out of your wallet.

Okay, some of you will have gotten into debt other ways. For example a family emergency could easily cause you to run up debt, yet your habits might otherwise be financially sound. I'm speaking to what I understand to be the majority pattern here, charging the cards to the max and letting it ride.

What will keep you out of debt is sound financial practices. For myself that means paying off the credit cards every month, and keeping my expenditures at a level that lets me pay off the cards. Further I keep a well-stocked money market fund earmarked for emergencies, and always think before tapping that fund "is this really an emergency". I have a target level for the emergency fund, and strive to keep the balance at or above that amount. I also make regular, and large, contributions to my investment account.

What are sound financial practices for you may well differ, I'm just describing what I did.

I learned my financial practices in the midst of paying off my debt. I purposely spent a lot of time in my debt repayment process examining my spending patterns, and learning about what drove my spending habits. That gave me the visibility into my habits to allow me to change them, and which ultimately created the financial practices I just described.

Learn from your debt

What I am saying here is: Learn from your debt.

Before doing something drastic like selling an asset, wait. Consider, have you learned your lesson? If not, then you're not ready to sell assets to pay debt.

However, that's too broad a statement because sometimes people get so far out on the debt-limb that they have to sell some assets or lose out big time (e.g. go to bankruptcy). Again, "it depends" on your own situation what you yourself choose to do.

When to sell, what to sell

Actually, ideally, you'll never sell that asset. That is, until you're good and ready to sell it for other reasons.

For example, when I sold my Microsoft stock I had two very good reasons beyond paying off the debt. First is, as I said, my personal displeasure over owning the stock in the first place. (It was an accident of employment that made me a Microsoft shareholder) Second is that Microsoft's stock price had been in the doldrums for around a year, largely because of the Department of Justice lawsuit against Microsoft. As an investment it wasn't doing anything, and hence was a strong candidate for selling it anyway. It had previously gained quite a bit, splitting twice for example, making for large gains to earn from the sale.

Speaking from my experience, it's probably good to first sell assets that fit the above criteria. You don't want them anyway, or they're not gaining value anyway, or they're not fitting your current needs.

What to do after selling

Well, what to do next is pretty simple really. Assuming you've followed my advice, you're practicing some solid financial practices and you've learned from your debt.

By continuing the solid financial practices you'll probably stay out of debt. Plus, you'll have some extra cash flow because you're not saddled with the interest payment. The next thing to do is to see how much money you can put back into investments.

For example, what was your monthly credit payment before paying off the debt? Your monthly investment could easily equal the monthly credit payment. You lived earlier on the amount of money left over after credit payments, so you should be able to continue living on that same amount of money.

But maybe you want to raise your living standard a little. That's okay, so long as you keep sight of the solid financial practices. So long as you keep your monthly expenses less than monthly income, you'll have some money left over for monthly investment.