Should you sell investments to pay down debt?

Is selling shares the right thing to do to pay down debt?

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Managing our income and expenses is important for our finances, but our assets and debts are also things we need to keep on top of.

Our personal balance sheets are very important. I think it's best to take on as little debt as possible. But, if you do have debt, should you sell investments to pay it off?

In some situations you would definitely need to without delay. For example, if you have an overdue Commonwealth Bank of Australia (ASX: CBA) debt that needs to be paid ASAP then selling assets might be the only option.

But if you have a choice there is no clear answer, there are several things to consider.

The first thing is that having debt can theoretically make you bankrupt (if you don't pay it) but owning assets doesn't make you bankrupt, so if you would sleep better at night without having any debt then perhaps selling would be the right thing to do. Having fewer assets and no debt might be better than a lot of assets and even more debt.

Taxation is also a big consideration. Investments will be taxed on any income and crystallised gains you make, whereas paying off debt doesn't involve generating taxable income.

Another thing to think about is how much the debt is costing. If you have a credit card then you may be on the hook with an interest rate of 15%, 20% or more per year. That's a clear priority to pay off. However, things like HECS-Help and mortgages have a low cost of debt, so it doesn't make as much sense to pay them off quickly.

The final thing to think about is how good will your investments be? Paying off the debt is a guaranteed return, whereas the performance of shares and property can be variable (to put it mildly), some assets may perform really badly.

Foolish takeaway

I think it's a good idea to keep your debt as low as possible. Selling assets can trigger tax on capital gains and transaction costs, but having debt can be bad for a number of reasons. Owning the best shares is going to be better for your wealth than paying off your debt, but it's never a bad idea to pay down debt.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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