GetStocked - An AI Agent to help you pay back debt optimally
77% of Americans have some sort of debt, myself included. There are different schools of thought regarding how you should pay back debt optimally. One view that caught my attention was thinking about debt repayment in terms of opportunity cost.
What does this mean?
Let's assume you owe $10 000, your minimum payments are $200 and the interest rate is 10%. This means, assuming I didn't make a single payment the entire year, I would incur $1000 in interest.
I ideally don't want to miss any payments or pay anything below the minimum because that would hurt my credit score, making it harder and more expensive for me to get debt in the future.
How do I pay this debt optimally?
Assuming I have $1000 free money to use towards paying back my debt, should I pay the minimum or try and get rid of my debt as quickly as possible by paying off $1000. Intuitively, paying back my debt as quickly as possible makes a lot of sense because this means I would incur less interest, therefore paying less overall ... but, what is the opportunity cost of the $800 extra I spent on paying back the debt. In simple terms, what else could I have done with the money and what returns could this investment give me.
Factoring in opportunity cost
Using the same example, assume I could buy a stock that, over the last 5 years has returned 50% in returns. While historical returns aren't reflective of future performance, this can be used as a proxy. At this point the opportunity cost of investing $800 of my 'free money' in this stock is $400.
Comparisons
To compare which of the two will have a net benefit of my total worth, I would want to understand, how much I save in terms of interest if I pay back my debt aggressively versus how I much I would potentially make from investing some of the money in stocks. Of course this assumes I have the risk tolerance to accept the relative volatility of this
Assume I pay $1000 for month; I would pay back my debt in 11 months and incur interests of around $490. If I spent $800 on buying stock and paid off the minimum for my debt it would take me about 65 months to pay back my debt and I would pay around $3000 in interest. All things constant (assuming the the returns remain static). I could make up to $10k in the same time line, assuming I am investing $800 every single month. While the numbers are inflated, if I am likely to get more in terms of return from investing in stock than how much interest I would save from paying back my debt aggressively, it is more optimal to put more money towards investing in stock.
How the AI Agent works
The AI Agent automates these calculations. It takes in your debt, interest rate and minimum payments, searches for information regarding the type of debt you have, using this information to add a multiplier to the interest rate. The assumption here being that some debt obligations carry more legal consequences and have a greater impact on your credit score.
The Agent retrieves stocks, and their monthly returns over a 5 year period, it selects the top performing stocks, calculating the average annual return and compares how much I would save in interests paying back debt aggressively versus how much I would make investing the same amount in high performing stocks.
But wait....this could easily be an apples versus oranges comparison in the sense that more weight would be placed on larger debts (because they will carry more interest). The Agent normalizes this calculation by calculating how much I would save in interests for every $1000 of debt. This normalization is also applied to stocks.
The Agent proceeds to draw up visualizations, explaining it's rationale. The output is then sent you the end user via email.
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