Question

Assume that you have a $200,000 mortgage that has a 5% interest rate and no penalty for early payment, a $15,000 car loan at 7% interest, $5,000 of credit card balances at 13% interest and some investments in the stock market that have been giving you 8% annual returns. You inherit $100,000. What do you do with the money?

Answer 1

As only the Credit card Interest payment rate i.e, 13% is more than opportunity earning rate i.e 8% so we first paid all the credit card balance of $ 5000/- and put remaining amount of $95,000 in the invest to earn 8%. it will generate more interrest income than intererst payment of remaining items i.e, 7% car loan and 5% mortgage payment.