Most people see debt as an irredeemable drain on your finances. If you search “debt” on the internet, you’ll be bombarded with articles about how to eliminate it, how damaging it is to hold onto and how much of an epidemic it’s become in the United States. Debt is completely evil, right?
Having heaps of debt is usually bad news, but there are times when focusing too hard on being debt free is just as bad. If you’re locked into a low-interest rate, there are a number of ways you could potentially see a bigger return by putting your money towards other uses.
Read below to see when our experts recommend holding onto your debt.
Save for an Emergency Fund First
CFP Brandon Marcott of Edify Financial Planning said he regrets paying off $80,000 of student loans as quickly as possible. Now that he’s a financial advisor, he tells his clients not to focus too much on debt payoff.
Before throwing extra money to your loans, Marcott says everyone should save three to six month’s worth of expenses in an emergency fund.
Even legendary personal finance expert Dave Ramsey recommends building an $1,000 emergency fund before beginning debt payoff. Without an emergency fund in place, a simple car accident can turn into just another debt burden.
Marcott recommends thinking about what else you’ll need to pay for, including a house, car or new business. Debt payoff brings immediate satisfaction, but Marcott recommends considering what you’ll need to buy in the next five to 10 years.
Remember to Invest
One of the best reasons not to pay off debt early is if you can get a better return by investing that money in the stock market.
Jon Dulin of MoneySmartGuides said when he took out a car loan with .9% interest, he decided not to pay it off early. If your interest is below the standard rate of inflation (between 2-3%), there’s no rush to pay it off quickly.
Even though it may seem counterintuitive to be in debt willingly, the math may work out in your favor. Dulin said he used the return from his investment to make monthly payments on his car loan.
Jim Wang of WalletHacks said he also prefers investing his money instead of paying off his mortgage early, which has a 3.625% interest rate. For him, it’s better to keep the cash where he can easily access it.
“When you pay down the mortgage, the cash is stuck in the house,” he said. “You can’t access it unless you go with a HELOC [home equity line of credit], which will cost you; or sell the house, which will also cost you.”
Lee Huffman of BaldThoughts said he pays the standard mortgage payments on his investment properties and uses any extra cash he has to buy more rental units instead of paying down his loans quickly.
Right now, interest rates are still low and Huffman recommends taking advantage of them while you can.
“My goal is to buy as many rental properties as possible while I can still lock in these ultra-low rate mortgages,” he said.
Student loans and mortgages also offer tax deductions for borrowers, which is another reason to consider keeping them around if it makes good financial sense.
Decide What’s Best For You
For some people, the psychological advantage of being debt free is incalculable, so paying off debt – even if it’s at 0% interest – can make more sense. Having healthy finances is also about having a healthy relationship with your money, so consider whether you’re the type of person who can live with the emotional burden of being in debt.
But if you can stomach making those payments and putting your money toward better uses, you’ll be better off in the long run. Whether it’s saving for an emergency fund, planning for a wedding or starting a business, your money will go farther.
This advice mainly applies to people who are paying low interest rates, so don’t get too excited if you don’t fit that demographic. Once you reach 6% or higher, you’ll save more money by paying off your debt as quickly as possible. That could change after refinancing to a better rate, so always keep your options open and your finances in check.
What’s your take on early debt pay off?
Photo Credits: (c) Can Stock Photo
Zina is a writer, speaker, and coach that focuses on student loan debt and young adult money issues. You can learn more about Zina at Debt Free After Three.