Do you have a debt strategy that works? If borrowing all you can is your strategy, it's not going to work! Debts are both good and bad, but in general, the less debt you have, the better off you are. Many advisors will tell you to hold on to your good debt. They tell you to hang on to that mortgage and invest the money instead. Yes, it can be possible to earn more money in a mutual fund than can be saved by paying a mortgage off early. But you are still spending those interest dollars. If you pay off the mortgage early, you get the satisfaction of having not paid all of the interest. Then you can put the mortgage payment into a mutual fund that will potentially get you double the interest you were paying to the lender. You are still making money. You don't want to have to use your investments to pay off your mortgage just so you can retire. The ideal is to find a way to both invest and pay that mortgage off. Every once in a while there is an article floating around about using your home equity to invest in stocks. Home equity loans cost more than first mortgages, and are often adjustable in rate. Your paying interest on money to earn you interest. For example, if you are paying 12% to the bank, but making a return of 13%, is it really worth it. You are only 1% ahead. You should save your home-equtiy for other things, such as home improvements or emergencies. The key is to let your equity remain in your home. That way, if you sell, you have more to put towards your next home. A lot of new college grads complain about student loan debt. I will admit, it is awful. But a lot of people say that you should wait and pay it off last. I actually agree -- if your rate is low enough. During the first five years of repayment, the interest may be tax deductible. You are better off saving or putting money into an investment. For example, I have an interest rate of under 3% on my student loans. I'm paying them off as the last thing, because they are my lowest interest rate loans. And, of course, you should pay off all of your credit cards as soon as possible. There is nothing useful to this debt. Often, it goes to buy little things that add no real value to your assets. Dinner, vacation, clothes and groceries are things that don't make you more wealthy. Cut up the cards if you can't help but charge on them. Sit down and write out a plan for getting out of debt. The debt strategy that works is taking every debt and listing it in order of payoff. Just go down the list, paying things off. I like to start with the highest interest rates. This means you spend less in the long run. Others suggest starting with the smallest debt, as it brings faster gratification. Whatever works for you is fine. Just make sure you include every debt to your list. Save your mortgage and student loans for last. Get to work. Pay it off and get on with your life. |
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