Let Me Clarify
At some point in your life (if you haven’t already) you may wonder, “should I pay down debt or invest?” Most of these situations involve student loans, credit cards, mortgages, car loans and other forms of personal debt. With these items falling into just about any stage of life, everybody should understand the basic considerations behind this decision.
Let me clarify.
Unless you are fortunate enough to escape a college education without loans or you’re able to purchase a house outright, debt is almost unavoidable. Although most people would prefer to avoid debt in general, many of us have outstanding liabilities and need to determine the best approach to paying them off. At the same time, we all want our savings to grow. This presents us with the debate to pay down debt or invest.
It would be great if there was a single solution to every situation. Unfortunately, it’s not quite that easy though.
What are the numbers?
A great place to start is gathering the information about your interest rate(s) and the realistic rate of return that could potentially be achieved, based on the investment in question. Obviously, investment returns are never guaranteed, but it may not be a bad idea to use an average return from the past 10+ years (the longer the better). The idea is that if your interest rate is low and your investment potential is higher, then it may be a better idea to prioritize additional money toward investments; and vice versa.
Where is the source of the funds?
Another major factor in the decision-making process is the source of the funds. For instance, if you have extra cash on hand that you are planning to use, it can be a pretty straightforward comparison. But, if you are considering taking money out of your investments to pay down debt, then you need to consider taxes on your withdrawal, potential penalties, and other long-term impacts.
Are you capturing your full company match?
Do not forget that the company match on your employer sponsored retirement plan is basically free money. If you are thinking about lowering your contributions or are weighing the decision to contribute more vs. pay down debt, you will want to first focus on contributing the maximum matching amount.
I do recognize that we all have differing personalities. Especially when your interest rates and investment returns are close in number, it is good to remember that interest saved through additional debt payments is pretty much a guarantee; and that investing always has risks. The good news is that what you decide today is not set in stone and should be reevaluated on a regular basis.
Remember that financial planning is a long-term game. This means possible tax benefits for certain contributions, leaving an emergency fund buffer, and other potential impacts should still be discussed with a professional.
And if you settle on wanting to pay down your debt, I just might have some pointers coming soon about how to get the debt ball rolling.
As we embark on this clarifying journey together, I encourage you to submit any ideas, topics, or questions to email@example.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. “Let Me Clarify” is a weekly blog containing Chad Baxter’s insights and thoughts about a variety of topics. To learn more about Chad, click here
All performance referenced is historical and no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. Clarify Wealth Management and LPL Financial do not provide legal advice or services. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.