Why You Should Stop Paying Down Your Debt

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!

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36 thoughts on “Why You Should Stop Paying Down Your Debt

  1. Beating Broke

    I find myself torn between this and the pay it off camp. Yes, you can use the 0% offers and the lower interest rates to leverage your money and make money off of it. That’s what all the 0% credit card arbitrage was all about several years ago. What it doesn’t account for, however, is an emergency, or major economic issue. Flipping houses was all the rage a couple of years ago. People were leveraging their ARM loans to buy a house cheap, fix it up and then sell it for a large profit, all before the ARM came due. That worked great until the economy took a nose dive and a lot of them were left holding the house keys to a house that nobody would buy for what they paid for it.

    I guess, my point is this; It’s a slippery slope. One misstep and it’s all over but the crying. So, know that going into it, and act carefully, and you’ll likely be just fine.

  2. Ashley @ Money Talks

    Going along with this train of thought, the longer you wait to pay off your debt the “cheaper” the money because of inflation. For example, a $1,000 mortgage payment today is average but in 30 years it won’t be. My friend’s parents had a $500 mortgage payment when we were kids. I’d kill for that today.

  3. admin Post author

    @Beat Broke – You definitely need to keep it realistic, I agree. I just think there are very safe investments out there that should be utilized, something much less risky than real estate speculation.

    @Ashley – Good point, and Im sorry I didnt add that as a specific reason itself…thats actually a very good point.

  4. retirebyforty

    You have a point about the mortgages and student loans.
    I’ll have to disagree with 0% credit card though. It is way too risky to invest borrowed money. What happens if we get into another downturn? Can you always beat the market?

    From my experience with car purchase. You can pick from low interest or a lump sum up front. I think you can negotiate a lower sales price if you have cash. If you depends on the dealer for a car loan, they pretty much have you by the huevos.

    1. admin Post author

      I wouldnt recommend purposely borrowing in a credit card to turn a profit. However, if you already have debt, and this is the case for many people, then it’s an avenue to consider. You can’t always beat the market, but a certainty is that a savings account wont beat out inflation…sometimes you have to go above and beyond.

  5. MoneyCone

    It also depends upon one’s temperament. If I owe anyone anything, that is alway at the back of my mind. I need to pay it off!

    I’d say have a balance between paying off debt and keeping sufficient cushion.

  6. LifeAndMyFinances

    I am getting pretty sick of people saying they should carry a mortgage because of the tax benefits…. this is money that you’re getting back because of all the interest you’re paying. If you pay $5,000 in interest and the government gives you back $1,000, is that really a good deal? I’d rather owe $0 in interest and receive $0 from the government.

    1. admin Post author

      I find that most people don’t find themselves in the position of paying cash upfront for a home. Mortgages are likely for most of us, and the interest deduction adjusts the percentage we end up paying. Actually, it was your article on beating inflation that gave me a little inspiration on this article. 9 times out 10, I can beat my mortgage interest rate I pay through investments in my brokerage account. Im making money, not losing it.

  7. Marie at familymoneyvalues

    @Lifeandmyfinances – you and MR FMV – same thoughts exactly!

    We got where we are by being VERY debt averse…that means no mortgage, no car loans, no student loans, no credit card debt, no family loans and on and on ad naseum.

    I hope the 20 somethings out there that aren’t as astute at investing as you are listening to the other side of the story!

    Nice job on writing a semi-controversial post! Should get you some good comments.

    1. admin Post author

      I do want to say that Im not an astute investor. Im an average person with enough knowledge about the market to make relatively informed and risk adverse investments. It’s not difficult to beat some of the low interest rates we pay. People often blind themselves with fear of debt, and forget about the opportunity cost to paying down that debt.

  8. JT McGee

    Income tax rates are higher than the capital gains tax rate, so for those with higher income it makes a lot of sense to invest borrowed money, especially money borrowed from a home.

    If you spend $5,000 in interest, for example, and get back a $1,000 tax savings, that’s a 20% tax rate. Long term capital gains taxes at 15% on $5,000 amounts to $750. Assuming you can meet or beat the risk-adjusted interest rate on a mortgage, it makes little sense to pay it off.

    This is a fairly simple concept in finance (capital structure), but it is completely ignored in personal finance. Shame, really.

    1. admin Post author

      JT – My thoughts exactly! Im kind of disappointed that I didnt go deeper into this. I always say that corporate and personal finance are quite similar, and this is a great example…unfortunately people rarely see it that way.

  9. Hunter

    I definitely agree with your main argument of not taking on additional debt. Let’s face it, if you have credit card debt it’s because of a failure to plan ahead. I’m open to alternatives, like some of your suggestions, but the more debt I have the less sleep I get.

  10. Super Frugalette

    Thanks for offering a non-traditional approach. When my husband decided to purchase a new car some of the things he considered was the lower interest rate he received as well as the warranty. Combined he felt that for us, at this time, a new car offered us a better value.

  11. ashley

    As an accountant, I must say I disagree with much of this; however, I do think it would be smart to keep the “extra” money you could pay down on your debt set aside (don’t spend it) but invest it until its needed to make a payment on the debt IF the interest rate you are earning is greater than the interest saved from paying off the debt early.

    1. admin Post author

      Im a corporate accountant and financial analyst, so I see it from several perspectives…but what you said I agree with. I wouldnt spend the money, I would invest until the debt comes due.

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  13. Judith

    I’m one of those who don’t believe in incurring debt to begin with. I’ve seen too many of my young friends suddenly, unexpectedly lose their steady incomes following accidents or illnesses. Therefore, I believe in savings, not debts.

  14. barbara wright

    If I were in debt, I wouldn’t be able to sleep at night. And I can’t imagine doing the 0% financing for 5 years. I’m sure they don’t send you a letter at the end of 5 years to tell you that you have to pay it off in the next 30 days or else you will be paying all the interest.

  15. Paula @ AffordAnything.org

    If you build credit-card debt with one-year, 0% APR and you invest that same money, you must invest that money ONLY in a “guaranteed” gain (a CD or money market account). Otherwise you stand the risk of loss within the short time span of one year. True, long-term annual returns will be 6 – 9 percent in stock funds, but that’s the long-term. Your money could crash during any given 12 month period.

    That said, my boyfriend does make big purchases with his Home Depot credit card — which has 0 percent interest for the first six months — and then he takes the full amount of that purchase and sticks it in a money-market account, which is guaranteed never to lose value. He earns 2 percent annualized (so 1 percent in 6 months), then pays off the credit card in full on it’s due date. It’s not a whole lot of money we’re talking about — 1 percent of $1,000 is $10 bucks — but it’s something.

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  21. Tammy

    Strategies like this only work for people who are fiscally responsible to begin with. The train of thought here also is quite dependent on overall lifestyle and family makeup. With jobs scarce to come by and a soft housing market, it’s a gamble should anyone need to sell and move. The more that’s paid down the more you get to keep in the end to make a down payment on another property even if the house sold at a loss.

  22. Mariah

    I am so torn on this issue and I seem to sway back and forth about how I want to approach it. You do make some very good points and I appreciate them. I will admit that I just made a big furniture purchase because it is 0% until summer of 2015! That made it worth it to me!

  23. Sarah L

    I have no credit card or other debt, own my 2002 car and just paid off my mortgage after 27 years. I sleep well at night.

  24. Erica C.

    My biggest problem with not paying off debt right away is that I just hate knowing I have that debt. I’d walk around with it on my mind if I just stopped paying!

  25. Happi Shopr

    While I get what you’re saying, I just don’t want to leave a burden on my family one day. And knowing that the debt is getting paid down eases my troubled mind.

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  27. Car Negotiation Coach

    I’m with ya! There’s a big difference between good debt and bad debt and if you understand that you can use debt as a tool to build wealth. Personally, I refinanced at 4.625 and wouldn’t dream of trying to pay off my house early!

  28. luckylifepath22

    i agree with most of this because there was a time when i had some extra money flowing in and i used it all in an attempt to pay down some debt. lo and behold, soon after i did this my max credit limit was drastically reduced on all the cards i paid down and my interest rates went up. granted i didn’t have as much debt, but my credit score was just as bad and i no longer had any extra money to pay them off…

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