When Not to Pay Down Debt

June 09, 2016

In her new book, What Your Financial Advisor Isn’t Telling You, our CEO, Liz Davidson, writes about how paying off debt can be your greatest investment. As they say, a penny saved is a penny earned so if you pay down credit card debt at 19% interest, it’s like earning 19% guaranteed tax-free. But as with most financial planning guidelines, there are exceptions. Here are some situations where paying down debt may NOT be your best investment:

You can’t pay your bills. If you’re in severe financial difficulty, make sure you prioritize keeping a roof over your head, your car in the driveway, the lights and water running, and food on the table even over paying the minimum on your debts. Don’t jeopardize you and your family’s basic well-being to pay down debt that you might have to liquidate in bankruptcy anyway. In fact, if you think you might file for bankruptcy, don’t borrow or take withdrawals from a retirement account to make debt payments since those assets are generally protected in a bankruptcy.

You don’t have sufficient emergency savings. To avoid the problem above, you’ll want to have some emergency savings. You should have enough cash to cover at least 3-6 months’ worth of necessary expenses.

You can consider your ability to borrow from a retirement plan or the Bank of Mom and Dad as part of your emergency resources but not lines of credit since they can easily be cancelled, especially if you’re in between jobs or the economy is weak. This money should be someplace safe like a savings account or money market fund. Yes, the interest you’ll earn is probably much less than the interest you’re paying on debt, but how do you value avoiding eviction or foreclosure on your home?

You’re not contributing enough to max your employer’s matching funds. The only thing that beats saving 19% interest is earning 50% or 100% on your money. If you’re not maxing the match, you’re leaving free money on the table and getting behind on your retirement saving.

Your debt is costing you less than 4-6% in interest. If the interest on your debt is below 4-6% (after any tax deductions you get for the interest), you could probably earn more by investing extra savings (particularly in a tax-advantaged account) than you’d save by paying down that debt. That’s why they call low-interest mortgages, car loans, and student loans “good debt.” If the interest rate is between 4-6%, your decision depends on how aggressive an investor you are. Conservative investors would likely be better off (and happier) paying down the debt, while more aggressive investors are likelier to earn more by investing instead.

None of this is to suggest that paying down high-interest debt isn’t generally a good idea. These are just the exceptions. If you’re able to pay your basic bills, have sufficient emergency savings, are maxing the matching in your retirement plan, and have high-interest debt, paying it off IS your best investment.

Small Changes Now Can Mean Big Long Term Results

May 08, 2015

In a conversation I had recently with an employee of a large healthcare company, the topic of retirement planning and investing merged together. She had recently started her job and wanted to be sure that she got off to a good start. Her prior employer had no financial wellness benefits provided so this was her first conversation with a financial planner. The conversation was very revealing about her views of herself, the world of investing and the level of financial knowledge that many people who work in financial services business assume that individuals have when they walk in for a conversation. Continue reading “Small Changes Now Can Mean Big Long Term Results”

Are You Afraid of Your Student Loan Debt?

October 30, 2014

What’s really scaring you this Halloween? If you have student loans, getting that bill might rank pretty high on the list. After all, no one likes owing tens or even hundreds of thousands of dollars  that will seemingly take forever to pay off. That doesn’t mean paying off your student loans should be your only or even top financial priority though. Here are some other goals that you might want to prioritize first. Continue reading “Are You Afraid of Your Student Loan Debt?”

Money Tight? Make it Work Harder For You

March 11, 2013

Last year, employees got a break, a 2% bump in their take home pay, thanks to the payroll tax holiday enacted by President Obama to try to boost the economy in 2011- 2012.  The employees’ share of Social Security taxes were reduced from 6.2% to 4.2% for a time.  Like all good things, it came to an end and now employees are feeling the squeeze. Continue reading “Money Tight? Make it Work Harder For You”

5 Reasons NOT to Pay Down Debt

January 31, 2013

One of the most common things we help people with is paying off debt. This makes sense because in the case of high-interest debt like payday loans and most credit cards, you can save considerably more in interest by making extra payments towards that debt than you’re likely to earn by investing that same money instead. Paying off debt can also improve your credit score and cash flow. But are there times when it may make sense NOT to pay off debt? Here are a few: Continue reading “5 Reasons NOT to Pay Down Debt”

Save 1% More for Retirement in 2013

November 19, 2012

A wise Italian once said, “Perfect is the enemy of good,” meaning when we insist on perfection the results are often no improvement at all. When the goal is so high up on the pedestal and seems so unachievable, we simply give up.  I’ve certainly experienced this phenomenon personally and seen it manifest with the many individuals and families I have worked with over the years as a financial planner.  Building an emergency fund with six months of expenses, saving 10- 12 % of income for retirement, funding children’s college educations, and making extra payments on a mortgage are just a few of the financial goals people have.  Each of these goals needs to be funded while at the same time, other expenses are increasing such as health insurance and household bills.  Continue reading “Save 1% More for Retirement in 2013”