Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
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.
Subscribe to the Select Newsletter!
Our best selections in your inbox. Shopping recommendations that help upgrade your life, delivered weekly. Sign-up here.
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 whether to take out a student loan or to tap into your investments to finance this expense.
If you left that $10,000 in the stock market, with the average 8% annual return Cannon identifies, after 10 years that investment would grow to be worth $21,589 (assuming no additional contributions).
Meanwhile, the $10,000 federal student loan you would take out, on a 10-year standard repayment plan with an annual interest rate of 5.28% (the interest rate for federal graduate unsubsidized student loans, at the time this article was written), would end up costing a total of $12,893 after 10 years (assuming you paid the minimum each month).
In this case, taking out a student loan to pay for grad school makes more financial sense than withdrawing the money from the market — you’d rather lose $12,893 than $21,589.
Stuck with a high-interest private student loan and want to pay it off using your investments?
First consider refinancing your student loans through lenders like SoFi or Earnest to score a lower interest rate before turning to your investment earnings. Both offer low rates, no origination fees, flexible repayment terms and economic hardship protection. Once you refinance, the lower rate may mean it’s worth keeping your money in the stock market.
Should you use your investments to fund a business?
The situation, however, may look different when deciding whether or not to use your investments to launch a business.
Taking out an unsecured small business loan without a financial track record could leave you paying a much higher interest rate and it could exceed the return that you might anticipate on your investments, Buhrmann argues. In this case, you could be better off selling some of your investments to jumpstart your new venture. When we say this, we mean investments other than your retirement fund. While you can withdraw money from your 401(k) to start a business, you should first consider the implications that would have on your retirement if your business fails. Plus, you’ll have to pay income taxes and a 10% penalty if you withdraw money from a 401(k) or IRA before age 59½.
And if you’ve already taken out a small business loan and want to pay it off using your investments? “If you took out a loan while inflation was high and the loan had a locked rate, it would make a lot of sense at that point to pay the loan off using your invested capital,” Cannon adds.
The key, he says, is to determine if the annual interest rate you are paying on a loan exceeds the average return on your investments in a year.
Budding business owners take note
Remember that although a new business venture can potentially offer big rewards in the long run, it also comes with a great deal of inherent risk.
“If you sink all of your investments into starting a new business, you will have nothing to fall back on aside from acquiring debt,” Cannon says. “It is important to realize that, in most cases, income is not readily flowing back to a business owner during the first several years.”
If you’re wanting to start your own business, make sure you account for this by having reserves on hand to survive those first few years. “Low capital reserves are often the main reason why new businesses fail,” Cannon adds.
So, if you want to have a cushion in case things don’t go to plan, it can make sense to maintain a healthy emergency fund and not sell all of your investments.
At the end of the day it’s more than just the math
Weighing the potential return on your investments versus the interest rate you’d pay if you took out a loan is an effective way to know if you should use your investments to pay for school or fund a business. However, Buhrmann points out that at the end of the day there are no “right answers” and what works for someone else might not work for you.
“There are mathematical aspects and also behavioral aspects,” he says. “Math and finance might dictate that you should borrow the money to finance the endeavor, but if you’re going to lose sleep or it impacts your health by taking on debt, then by all means, ‘pay cash‘ for the expense and sell some of your investments.”
If you’re someone who is thinking about cashing in some of your investment earnings to fund a lifestyle change, consider speaking with a reputable fiduciary investment advisor who can act as a sounding board and provide guidance.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
