As much as no one enjoys living in debt, the amount of people who can boast that they’re debt free is very few. One could arguably state that about half the American population lives in debt. Now everyone is trying to be debt-free one way or another however wanting to get out of debt and actually being debt-free are two different things. However, have you ever asked yourself is if paying down your best is the best strategy to employ for your money? Well, let me share with you a few situations where paying down debt may not be advisable!
Reason #1: Your loan interest rate is lower than potential investment ROIs
Generally, if your investments generate higher interest returns on your money than the cost of your debts, you should refrain from paying down your debt beyond their minimum payments. For instance, if the interest rate on your mortgage is 5%, and let’s say you find an index fund that is generating a 10% return per year, you’ll come out ahead by investing your extra cash in the index fund.
However, if your debt is at 20%, it’s better to pay down that debt as soon as possible. Although, it has to be said that its investments don’t always provide the same return year over year so this decision to pay off debt or invest will change sometimes even by the day. For example, the index fund that stood at 10% now might drop to a 2% return the following year.
Another factor to keep in mind when weighing this decisions is your risk tolerance. You may or may not be comfortable postponing debt repayments to invest instead given the risks that investing poses. However, if you’re comfortable with the risks that come along with investing and are confident in the investments you’ve chosen then go for it.
So, what types of debts are often postponed to take advantage of better returns in the market? Mortgages and student loans usually tend to charge relatively lower interest rates making them debts that can be pushed to the side. On the contrary, credit card debts are rarely a debt you’ll want to push off.
You should definitely pay off your high-interest credit card debts as quickly as possible. However, you would do well by paying the other debts with low-interest over time. This is so you can…