Is hyper-focusing on debt pay-off the right financial move for you right now? While it’s no secret that we frugal friends love debt freedom, there are some considerations to make before jumping head first into debt pay down. Listen in as we discuss some additional pieces to think about on this financial journey!
- Your Roth IRA. Yes, yours. That account that holds investments that will grow so you can retire. Do you have one? Even if you don’t plan on investing in it, you should open one to start the clock on the 5-year rule. Google that if you want but if one of the reasons you haven’t started a Roth IRA is because online brokerages like Vanguard and Fidelity overwhelm you, try M1 finance, it’s a fee-free robo advisor with many of the same low-cost funds and it’s very easy to use. And if you sign up through frugalfriendspodcast.com/m1 and deposit $500 in your Roth IRA, you support the show at no extra cost to you.
- Maslow’s Hierarchy of needs. Why you ask? Because I need you to know that not all needs are created equal. And while some needs are more important than others, pursuing any “need” that improves your life is not bad. Maslow’s Hierarchy of needs, the triangle for your basic, psychological, and self-fulfillment needs.
Check out these episodes for more info on this topic!
- Ep 142: How to Pay off debt faster
- Ep 138: Why paying off debt is important
- Ep 82- why you can’t finish paying off debt
What the Internet has to say:
This article from Yahoo Finance provides some click-bait about Mark Cuban and then explores why paying down debt can be considered a ‘safe’ investment.
What Jen + Jill have to say:
- Debt is like investing, but in reverse. Same principles apply. Paying down debt as fast as possible is going to provide the most value in the long run
- the interest rate on your loan is essentially like the rate of return on your investments but backward.
- Focus on the interest rate – usually expressed as your APR. Debt with a high APR is almost always going to be better to pay down before you focus on any other financial priorities beyond the most basic necessities
- Know your risk tolerance
- Some investors may take a calculated risk in the hopes that their investment returns will outpace the cost of borrowing but when it comes to personal finance – the answer remains that the SAFEST investment – the one erring on the side of caution, says to pay off that debt!
- What really matters with debt and investments – If your personal loan has an APR of 15%, investing in stocks is probably not going to return enough to make it worthwhile.
- Every loan is different – some offering terms that are actually quite favorable and others that can be excessively costly.
- Does your interest compound?
- Compounding interest — like that on most credit cards — means that the money you pay in interest is added to the amount due and you’ll then have to pay interest on it in the future. That can lead to debt snowballing and growing exponentially. So, not only do credit cards have high interest rates, but they also make for debt that’s growing faster and faster unless you take action to pay it down
- Costs of debt are set, investment returns are not
- Don’t forget taxes! Some interest can be deducted from taxes, but much more tax relief in 401k or Roth IRA than in debt pay off. Could be a niche reason for prioritizing investing over paying off debt.
More from the Internet:
This article from Credible provides a list of basic questions to be asking yourself when in the debt pay-off journey
More from Jen + Jill:
- Do you have an emergency fund?
- Yes – focus on student loan pay off
- Do you have lots of credit card debt?
- No – focus on paying off high interest credit card debt first before paying off student loans
- Do your student loans have high interest rates?
- If your student loans are between 9-13% this is high and you may want to consider paying these off early
- Do you contribute to your retirement account and receive your employer match?
- Yes – if you are also contributing to your 401(k) and getting the match you can also consider paying off debt soon
- Are you already contributing to other life goals? (i.e saving, investing, paying off high interest debt)
BILL OF THE WEEK –
- Thank you for sharing your bill about paying off high interest loan 16 months early
- Thank you Emily from Ohio for sharing your bill about your rent and negotiating a discount – we’re so glad to be courage buddies!
If you want to submit your bill of the week visit frugalfriendspodcast.com/bill to leave us a bill
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Would you change anything about your debt payoff?
- Jen- would have wanted to be focused on investing a bit sooner
- Jill- looking for higher paying jobs – not thinking I was stuck there
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Thanks for listening! See you next week!