At times, tackling debt may demand tapping into resources beyond your checking account. That includes selling assets, like stocks, to fund repayment.

But when does that make the most financial sense?

This article will crack open three financial scenarios, looking at both sides of the equation. Using different assumptions for stock performance and debt cost, you’ll learn the type of tradeoff you can expect between the two.

Unlike most articles covering the topic, this won’t be riddled with generic statements.

Instead, this piece will break down the math so you can truly understand your options and answer the question: should I sell stocks to pay off debt?

Mental accounting and debt

Everyone is susceptible to bias. A common bias in finance is mental accounting, where different accounts (like your checking account, savings account, mortgage, credit cards, etc.) are thought of separately and not considered in relationship to each other.

By separating various facets of your economic profile into different buckets, you might not be optimizing your assets and liabilities. In fact, you might be leaving money on the table by thinking of each account individually.

For example, you might be earning a modest amount on your investments while at the same time paying a steep price in the form of interest on your credit card or other debt. In that case, it could be smart to sell those assets to pay down the costly credit obligation.

Think of it this way: eliminating a debt that costs 15% in interest annually will have the same economic impact as earning 15% on an equivalently sized investment.

People tend to think of debt and investments separately, but they should be seen as parts of the bigger, entire financial picture.

Evolving environments

No one knows the future of interest rates and stock market performance. All anyone can do is make educated decisions based on current conditions and historical trends.

Nothing is guaranteed.

One year, it might be wise to sell your stocks to pay down debt. The following year, the opposite might be true.

For example, following the Covid-19 pandemic and resulting supply chain disruptions, equity markets in 2022 were spooked about long-term economic fallout. As a result, the S&P 500 experienced its worst year since the Global Financial Crisis in 2008.

In 2022, it made sense to tackle debt instead of staying invested in a losing market.

But in 2021, when the market returned over 16%, it might have made sense to have remained invested instead of using funds or assets to pay down debt.

Should I sell stocks to pay off debt—crunching the numbers

Let’s look at a few scenarios. Keep in mind these are simplified examples that assume no fees on either the stock position or any of the debt. Nor do the scenarios account for tax implications.

Before making any final decision, it’s imperative to account for all the costs that can impact the calculation. Better yet, consider speaking with a financial advisor to discuss the best strategy for you.

Scenario #1—Average stock return vs. current mortgage rate

  • Stock market return: 10%
  • Mortgage interest rate: 7.49%

Imagine you have $10,000 invested in the stock market, and you’re trying to decide whether you should sell the position to contribute more to your mortgage. Should you do it?

Probably not.

Currently, the 30-year fixed rate mortgage in the U.S. averages 7.49%. Unless you signed your mortgage recently, your rate is likely even lower. Possibly much lower.

In terms of the stock market, the average annual return over the past half century is 10%. If you expect this average to persist, keep your money invested and continue paying your mortgage as usual.

  • Return on stock portfolio after one year: $1,000
  • Interest cost on $10,000 worth of your mortgage: $410

By not contributing the $10,000 to your mortgage, you’ll have paid $410 in interest. And looking at it the other way, if you'd put that $10k toward the balance on your mortgage, you'd have saved that $410.

But, by leaving the $10,000 invested, you could potentially earn $1,000. So, by staying in the stock market, you could be $590 ($1,000 less $410) better off than you would be by paying down your mortgage.

Scenario #2 - Post-Covid crisis vs. current mortgage rates

  • Stock market return: -19.4%
  • Mortgage interest rate: 7.49%

Of course, the average annual return isn’t necessarily the return you’ll experience. At times, economic conditions can drive lucrative bull markets, but they can also lead to a substantial drop in stock prices.

So, let’s turn to a more extreme scenario.

Imagine the same mortgage rate, but assume your stock portfolio drops 19.4%. This might seem like a steep slip, but it’s actually the return the S&P 500 experienced in 2022.

In other words, it’s well within the realm of possibility. In fact, it can get much worse. In 2008, the S&P 500 lost over 38% of its value.

Recall that the mortgage interest cost on $10,000 of principal is $410. At the same time, if you invested $10,000 in the stock market for 12 months and it returned -19.4%, you’d experience a loss of $1,940.

Clearly, in this second scenario, you’d be far better off exiting the market and paying down more of your mortgage. You’d have saved $410 in mortgage interest and spared yourself losing $1,940 in the stock market.

Overall, you’d be $2,350 better off than staying invested on Wall Street.

Of course, this example assumes a particular set of conditions, performance, and costs to show you the potential of an extreme market scenario.

For the average investor, however, trying to time the market may not be the best way to save on debt payments. Not only does it require extensive knowledge and time resources, it can be stressful.

More than anything, it usually results in worse portfolio performance overall, even among professionals.

In fact, over the past decade, less than 7% of active equity funds have beaten their passive benchmarks, such as the S&P 500. These are experts who are working full-time to time the market.

But even within this select group, the majority can’t do it successfully.

Scenario #3 —2021 stock market return vs. average credit card APR

  • Stock market return: 16.26%
  • Credit card interest rate: 24.45%

The final scenario will look at another, typically much more costly, form of debt: credit cards.

Imagine having $10,000 worth of credit card debt and $10,000 invested in the S&P 500. Assume the stock market appreciates 16.26%, the rate it returned in 2021.

Assume, too, that the credit card carries an interest rate of 24.45%. Although that might sound like an exaggerated, made-up rate, it's the current average APR for new credit cards in the United States.

So, what should you do? Remain invested in stocks or sell and pay down your credit card balance?

At 16.26%, this return is well above the average annual stock market return. Obviously, it makes sense to remain invested, right?

Incredibly, no. Even with this exceptional performance, paying off your credit card makes more sense.

At 24.45%, your credit card will cost you $2,445 annually in interest on a $10,000 balance. At the same time, remaining invested in the S&P 500 would generate a gain of $1,626. Overall, this would result in a net loss of $819 ($2,445 - $1,626).

If you were to sell the stock position, you would forgo the $1,626 gain, yes, but you’d also avoid the cost of $2,445 in interest. The net benefit to you would be $819.

So, should you sell stocks to pay off your debt? If you believe the rate of return on your stock portfolio will be less than the interest rate on your debt, pay down the debt.

Alternatively, if you expect the rate of return on your stocks to be greater than the interest obligation on your debt, it makes sense to remain invested.