We often face a range of emotions when it comes to making important financial decisions in our household. It is fascinating to see the core personality within you that rises to the top when your financial back is against the wall and you are pressed to make a money decision. FEAR and GREED factor in heavily when we think about buying and selling stocks, but how about when it comes to paying debt off? One of the internal debates we see people having every single month is whether to keep the brokerage account/savings account they have built up or just pay off the debt that they currently have. Which is a better option?
On the surface, this appears to be a pretty easy question to answer. If in the interest rate or overall rate of return you are earning in your brokerage account is better than the rate of interest you are being charged on the debt then just flat out pay it off, right? For example, if you savings account is earning 1% and the interest rate on your car loan or credit cards is 7%, then it would just make sense to pay it off, correct? Would this even include a mutual fund or stock based account that has been earning 8 to 10% a year?
The truth is that I am a big fan of paying off debt at all costs with a few minor exceptions (which I will review in a minute). You can compare interest rates all day long, but most of us just aren’t built to handle the emotional stress of debt. The fear that we may go broke is so much more powerful an emotion than the excitement of getting rich. You might have a fleeting moment every once in a while at the racetrack or the casino, but the wear and tear of thinking about your bills every Sunday will surely peel off years from your life.
My exceptions are in three separate areas. First, that you have at least a minimal cash reserve. Don’t use your credit cards as float. Get to one month reserve first, and then build it up to three to six months. Second, try to avoid retirement plan penalties. I’m not a big fan of 401k loans and do your best to keep the integrity of your IRA and Roth IRA accounts. Last, if the debt is zero. Some of you may have been able to literally get an interest free loan for a year and you can do better with your cash than zero. Just don’t spend it as you will have to pay off the debt at some point.
It’s never fun draining your brokerage account or savings with that sinking feeling that you will have to start over. However, going to work every day to your job with the thought that the only reason you get up to work is to pay bills is something I wouldn’t wish on anybody’s personal situation. Don’t let the fear of having no money stop you from paying off your debt. It will free you up emotionally to be better at your job and better off in life.
Written by: Ted Jenkin
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