Not too long ago, I wrote an article giving reasons why you should avoid paying down your credit card debt. It was actually my second most popular article I’ve written to date, that is, if you consider views to be the benchmark for popularity. Though I will say that it was my most controversial post as well, and I still seem to receive a comment or email disputing my reasoning. To all you personal finance enthusiasts out there….I GET IT! Mainstream thinking tells you that paying down your debt as quickly as possible is second only to not incurring the debt to begin with. Well I’ve decided to take the topic one step further, and I’m going to give you five reasons you should stop paying down all forms of debt. Let me just say that I am not telling you to default on your debt, rather, to think about how to use extra money for something other than obsessivley compulsive payments on debt!
Ever hear the tip on bi-weekly mortgage payments? Many of us pay our mortgages one time a month. Well I have seen many finance articles tout the benefits of paying half your mortgage every two weeks instead. Say you made two payments a month, well that would only come out to 24 payments in a year. However, if you make a payment every other week, you will have made 26 payments on your mortgage in a year. This actually comes out to 13 full mortgage payments annually. You pay a lot less in interest over the life of the loan! If you can spare the cash, and I’m willing to bet many could accomplish this, I still think you have it all wrong. What if you don’t live there forever? What if you only live there for 5 years? Don’t pretend to know the future, because you dont. If you only live in your home a few years, those benefits become minimal. However, that mortgage interest deduction will be rock solid those first few years, and is quite the benefit for us taxpayers. You can get into a mortgage at a rate of close to 4.5% right now, couple that with the interest deduction, and it’s not very hard to outpace that amount with relatively safe investments.
Student loans are running rampant, you know it, and I know it. We just need teenagers to understand the impact these loans will have on their future. However, if they stick with their degree, many of them receive a decent paying job as a reward. I could write a whole article on minimizing student loans, but for now let’s stick to mitigating their impact on our post-graduate finances. I come across one or more articles every single day about how to payoff your student loans. I say that you should pay them down, according to schedule, but don’t worry about paying them off just yet, at least under a few specific circumstances. Yes they can follow you anywhere and everywhere you go in life, since it’s the only unforgivable debt I know of. Though many people meet the income requirements for deducting student loan interest, and those people would be better off investing their disposable income rather than throwing it at their loans. In comparison to other forms of debt, student loans (especially the subsidized variety) are relatively low interest bearing loans.
Do you have credit cards? Do they have a balance? Last question, how good is your credit? I’ve said before, and I’ll continue to repeat this…if you can obtain an interest free credit card, take full advantage of it! If you can get approved for a 12 month zero APR card, then invest your money and wait to pay the full balance until it comes due. I know it sounds irresponsible, but I’m not telling you to go out and incur more credit card debt, I’m just simply giving you advice on how to handle debt that you may already have.
Ok, so I’m going to buck the trend again and talk about car loans. I’m sure many of you buy used cars, I’m good with that, but there are still quite a few people buying new cars as well. There are also plenty of good financing deals for new vehicles that won’t find in the used market, such as 0% financing for 5 years. Somehow this deal is still around, and it’s not a gimmick. Let’s push aside the immediate depreciation on the value of your vehicle the minute you drive off the lot, and simply focus on the financing itself. Why pay anymore more than the minimum on this car? Why take money out of a savings, money market, or brokerage account to pay this off upfront? It’s not costing you a dime in finance charges, just make sure you pay it off in 5 years and keep that money invested.
The most important of all reasons is the affect inflation is going to have on your savings. People focus on the diminishing social security fund, or another potential economic meltdown, but I’m more concerned with inflation. The old adage about the only two certainties in life are death and taxes is in bad need of a makeover. We should start including inflation as the third certainty in life. Dividend stocks, mutual funds, ETFs, Roth IRA, 401K, tranditional IRA…. this is where that extra money needs to start going!