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Returning to higher education or starting a new business are two lifestyle changes that provide an opportunity to raise your future income potential, but they also require a large upfront investment of money.
In fact, investors under 55 are likely to pay for their schooling or fund a new business venture by using their investments, a survey by Select and Dynata found. Over half of respondents aged 18 to 54 reported that they invest to fund a business, while over half of 18- to 34-year-olds and nearly half of 35- to 54-year-olds said that they invest to pay for school.
It seems that selling investments to fund these two expenses is quite typical, but is it a smart move? Answering the question really boils down to whether it makes more sense to cash in on your investment gains or borrow the money instead.
“You need to understand what your percentage of interest [would be] on your debt and ask yourself if you can do better in the market,” CFP Bryan Cannon, chief portfolio strategist and CEO at Cannon Advisors, tells Select.
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Should you use your investments to pay for school?
Joe Buhrmann, a CFP and senior financial planning consultant at Fidelity’s eMoney Advisor, suggests that if the student loan interest rate — especially if it’s a federal student loan — is low and attractive, it may make more sense to retain your investments and instead borrow the funds to pay for school. In this case, your rate of return in the market is likely going to be higher than the interest rate you’d pay on your student loans.
Cannon wants investors to keep in mind that the markets over the last 20 years, which experienced two significant -50% bear markets, have averaged gains of 8%+ per year (note that past performance does not guarantee future success). “As a general rule, especially in this low-interest-rate environment, it is not a good idea to cash in investments to pay for school or pay off school debt, especially for younger investors who have a 10-plus year time horizon until they need access to their [investment] funds,” he says.
Let’s use a hypothetical example to see how this could play out. Say you need $10,000 to pay for credits in your last year of grad school, and you are deciding …….