All good points, but you are missing one consideration. Paying off debt is a perfectly risk-free investment, but also an investment that is difficult to withdraw. I have a couple of months salary in a bank account earning ~0% interest, while paying a couple percent interest on a mortgage. In theory, I am throwing money away and should pay off as much as I can. The difference is that the money in the bank account is easily available if I need it.
You are absolutely right that anyone paying 20% interest on credit card debt should pay it off before thinking about investments.
Insolvency is very expensive! You can map it into the framework outlined in the post by assigning insolvency some interest cost of x% where x% >> 4%. If you don’t like assigning a made up interest cost to being insolvent you can instead think of the whole thing in terms of a higher order representation such as utility. It then follows that you should cover your insolvency before covering most debts.
All good points, but you are missing one consideration. Paying off debt is a perfectly risk-free investment, but also an investment that is difficult to withdraw. I have a couple of months salary in a bank account earning ~0% interest, while paying a couple percent interest on a mortgage. In theory, I am throwing money away and should pay off as much as I can. The difference is that the money in the bank account is easily available if I need it.
You are absolutely right that anyone paying 20% interest on credit card debt should pay it off before thinking about investments.
Insolvency is very expensive! You can map it into the framework outlined in the post by assigning insolvency some interest cost of x% where x% >> 4%. If you don’t like assigning a made up interest cost to being insolvent you can instead think of the whole thing in terms of a higher order representation such as utility. It then follows that you should cover your insolvency before covering most debts.