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I would like to have a better view of the investment money as I just started to invest.

For example, I want to purchase a Nintendo Switch which was not planned at the beginning of the year. I could withdraw $300 from my investment account. -- The market right now is very good and I have made some good earnings. -- Or I could just use my credit card and pay it off by the due date. I certainly can afford it.

Which one is better?

  • Are you saying you would pay off the credit card before it accrues interest with disposable income? Or that you would be paying interest on the credit card? – Kat Feb 21 '18 at 1:30
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    if you're going to buy it and can pay it off within a month 100%. Then it's more or less the same, technically you'd be slightly better of if you use the credit card since that means your savings account earns interest for an extra 30 days. which is about 50 cents at 2% interest – Aequitas Feb 21 '18 at 3:29
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    @Aequitas: Where do you bank? I don't come close to 2% for a basic savings account at my bank. – Kevin Feb 21 '18 at 5:01
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    @Kevin Australia – Aequitas Feb 21 '18 at 5:05
  • You should also get at least 1.5% back on a decent card (possibly more, depending what cards you have and where the Switch was purchased - for instance, Amazon sells them, and you can get a 5% back card for Amazon purchases). That's worth way more than the interest on that amount in a savings account for a month, even at 2%, which I also agree, the best I've seen without a lot of hoop-jumping is 1.4%. edit: granted, possibly not in Australia... – neminem Feb 21 '18 at 17:58
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This is similar to Pete and Joe's answers but I wanted to add a little detail to explain why it's a terrible idea to pull money out of your investments for something like this. I found this site the other day and it's really helpful, I think, to get your head around opportunity cost. You should play around with it but let's talk about the yearly return of the S&P 500 (a proxy for the market) over last 5 years:

2017     21.93%
2016     11.93%
2015      1.31%
2014     13.81%
2013     32.43%

Is 2018 going to be like 2013 or like 2015? No one knows. Now consider that the market doesn't just increase day by day. Look here at 2013. On 10/19 it was at $1656.99 on the 22nd, it was 1754.67. That's 5% over the course of 3 days. What's your credit card charging you? Let's say it's as high as 25%. That's about 2% a month.

The problem is that you don't know when these jumps are coming. You pull the money out and you miss the 'opportunity'. While you are making income, you should really not be taking any money out unless it's really necessary. Even if you put the money back, you could regret taking it out.

Now, I'm not saying you should use buy things on credit. Only buy things you can afford. But I also believe life is for the living. If you have no debt and you have savings, there's nothing wrong with getting yourself something once in a while.

Addressing the following statement from a comment:

"it is better to liquidate investments than use credit cards"

This a very wrong misconception about investing and a huge mistake that can destroy your returns.

Let's say you need to fix your car, and you don't have the $1000 in cash but you need to get to your job so you can get money to pay for it. You can either liquidate some investments or use a credit card and pay for 2 months of 18% interest ($30). You should absolutely use the credit card and leave your investments alone. The CAGR of the S&P is around 10% historically but most of that growth comes from big jumps over short term time frames. In other words, in order to get that long term growth, you need to be in the market the whole time. The market routinely grows 10-25% over 2 months or $100-$250 in this example.

Of course, you could get lucky and the market could drop significantly over the same time or not really move a lot. But no one knows which it will be. The reasons this is a bad idea is the same as why market timing is a bad idea.

  • Credit cards typically charge 18%, much more than the average growth. There's also no reason for the S&P to grow at the same pace as it has. Why you don't add 5 more rows to your table? – Neil G Feb 24 '18 at 14:58
  • @NeilG No one is saying to hold credit card debt for a long time. In fact the answer says not to hold it at all. – JimmyJames Feb 26 '18 at 14:25
  • You answer is arguing that the market growth is higher than the credit card interest rate. On average, it is definitely not. It only looks that way because you chose the last five years. And so, going by average growth alone, it is better to liquidate investments than use credit cards. The idea that you can buy things without using credit cards or liquidating investments is not part of the question. – Neil G Feb 27 '18 at 3:59
  • @NeilG If you think the answer says that you haven't understood it. "Now consider that the market doesn't just increase day by day", "The problem is that you don't know when these jumps are coming.", I show an example year with 1% growth. You also don't seem to understand the question or alternately how credit cards work: "...use my credit card and pay it off by the due date" When you pay off by the due date, you don't get charged any interest, typically. – JimmyJames Feb 27 '18 at 14:34
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    This: "In other words, in order to get that long term growth, you need to be in the market the whole time." is silly. If we ignore trade costs, you would get half the growth in expectation if you were in the market for any period of time of half the length. Continuity is irrelevant. This is why it's better to liquidate assets than pay 18%. – Neil G Feb 27 '18 at 18:17
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If one has no credit card debt or other high interest debt, and already is saving the amount needed for the future, (of course has an emergency fund) and other income that can go to frivolous spending, it’s their right to do so.

That said, I prefer my spending to be far more mindful than random purchases. While in the earning years (note - I am retired) what was most important was to keep the retirement account growing with as large deposits as we could make and no withdrawals along the way.

In your case, if you have the money now, and think the item is worth it, it’s your money. In general there are ways to help you be more mindful, such as waiting X weeks for every $Y an item costs. e.g. wait 10 weeks to buy that $1000 big ass TV. If you want it that badly, you’ll still want it then.

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    I like this, I'd add that a good way to mindfully limit spending on 'wants' is to budget for them ($100/month on whatever I want, for example), that forces you to save up for larger purchases. – Hart CO Feb 20 '18 at 21:11
  • Fair enough. But if my “mad money” grows to a few thousand, I still prefer a time delay for the purchase. In the end, “whatever works.” – JoeTaxpayer Feb 20 '18 at 21:16
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    Yeah, I think both rather than one or the other. – Hart CO Feb 20 '18 at 21:29
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    It is hard to completely disagree with your "mindful" sentiment, but to be a stickler about it doesn't make sense. Why wait until retirement to enjoy the fruits of your labors? Odds are higher than one thinks that you'll either be dead or in such poor health that you can't get to enjoy all that money you saved by being a spendthrift. There's a balancing game that needs to be played between saving for the future and enjoying the moment. Part of enjoying life is spending more than you planned on spur of the moment and sometimes on frivolous things. Yes, think of the future but enjoy the now also – Dunk Feb 20 '18 at 22:54
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    My point was to avoid impulse purchases. Not to be a miser. Ideally, the budget includes a fair balance between retirement savings and enjoying life. And that one would be able to maintain their lifestyle in retirement. I think we are in agreement. – JoeTaxpayer Feb 20 '18 at 23:08
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I'd go with neither are good options.

The lesser of the two evils, considering the amount is probably the CC, but that is dependent upon your disposable income and employment details.

Investment money needs to "cook" over years. Sure the market will drop sometime in the future, but it will most certainly rise far above its current level. What are the timing of those events? Nobody knows. Let the money sit there, add add more money regularly. When you are old and gray you will be happy you did. In other words, let compounding work for you.

When one borrows money, as with a CC, ones plans are always good until something bad happens. I would advise you to first save the $300 (while also making investment contributions) in a savings account, and only then purchase the Switch. If you want to purchase this on a CC, well fine, if you are trying to get points, or free bread sticks, or whatever but only do so after you have the money saved. The money saved for the item should also be in addition to an emergency fund.

Now some may say: well "I make plenty of money, it is no problem to pay this off". The same logic works in reverse, if that is the case, then you can have the money saved in no time.

Getting started in investing is a great decisions and you should continue to make good ones. In this case save up the money for an item before you buy it.

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    This is the policy I follow, even for purchases as little as $50. Depending on disposable income and item price, you may only need to wait one paycheck to save enough for an "impulse" buy. – alex_d Feb 21 '18 at 1:00
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Buying a "want it now" toy with needed-in-future retirement money is very high on the Very Foolish Things You Should Never Do list.

Let me reiterate: very high on the list.

But you want the toy, need the toy!!!

I completely understand. Learn from my mistakes, though, and save instead of spend.

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    OP doesn’t specify anywhere that the investment money is for retirement purposes. If it was I would agree with you; but if it is just excess money I would go ahead and buy the “toy”. – ssn Feb 20 '18 at 21:09
  • I don't really see a difference, other than if it's in a retirement account. Obviously don't pull money out of retirement accounts pre-retirement. Apart from that, money that is spent wasn't for retirement, and money that isn't spent, is. Clearly you should save as much as possible for retirement, but equally clearly, you shouldn't totally deprive yourself of all fun until then, either. It's always a balance. The bigger issue I see is, while investing is good, I wouldn't want all my disposable income to be invested, either... – neminem Feb 21 '18 at 18:00
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Re-spinning a few of the previous answers...

Investment funds can be quite volatile. If they are any good, they go up more than they go down. Sometimes they go up a lot, sometimes they go up a little, and sometimes they go down.

So what happens if every time the fund goes up, you spend the profits on shiny new toys? Well, the fund never gets to grow. In the worst case, if you spend all the profits, then it will only ever shrink.

Even if you only spend part of the profits, then in the long term the growth of the fund will be much less than if you re-invested the profits.

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This seems mostly opinion based. After all, if you take some money out of your investments, you might as well put the same amount back from your next pay check.

But the one very real difference is transaction costs. Unless your broker allows withdrawing from investments for 0 fee, it is definitely better to use the credit card. For me, it would cost $7 to sell some stocks, which would be silly for just a $300 purchase.

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Credit card? According to me a big "No" for a purchase that is not a dire (emergency) requirement by any means.

Not just me, but greats like Warren Buffet have time and again advised against the use of credit cards. That too for a purchase that can very well be managed if you wait for a few more weeks/months, using CC doesn't make sense.

The reason is, small spends here and there turn into a habit with time. If you get caught up in a cycle of CC spends and due payoffs, sometime in future, you may begin to face the burden of CC debts.

Having said that, drawing invested money is not good either. According to your statement, you just have begun investing. Your objectives may become diluted if you are going to draw amounts from money which otherwise should grow with time.

My advice is this. Wait till you have enough disposable money to spend.

P.S. I am not from the US. Hence my views regarding CC may be completely different from many others in the forum.

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I'm making the assumption that you've decided to buy the Switch, either from stock sale or on credit (with payback before due date).

If you plan on reimbursing the stock account in the same time frame as a credit card payback (e.g. 30 days), then the stock sale carries with it tax consequences and potential gains and losses from the stock market (depending on the aggressiveness of your investments). I would expect the sale of stock and repurchase in such a short window to add extra costs above and beyond the tax consequences.

On the other hand, if you don't plan on replacing the money in the stock account, then the purchase (the Switch) becomes irrelevant and the question becomes "should I do some profit-taking in my investments?" The latter question is one only you can decide.

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