Pay off debt or save? It's a question that at times can be difficult to answer. There are a number of variables that can come into play and that can cloud which decision may be best.
Over the years, when it comes to paying off debt or saving our money, we've tended to lean toward debt reduction. And while this isn't 100 percent of the time, it has been the case with our financial decisions more often than not for several reasons.
A guaranteed return
Whether it was on our student loans or our mortgage, we knew exactly what return we'd get on our money by paying off debt. With interest on savings at or near zero right now throughout the past few years, it can leave us looking for riskier investments in which returns are anything but guaranteed. With many forms of debt, unless it's something like an adjustable rate loan, an interest rate is often well known and relatively stable. And while the stock market might have returned higher rates over the past few years, the market is typically an unknown variable where rates of return can fluctuate daily.
This left us feeling more comfortable paying off a set rate loan where we knew our money was providing a decent rate of return (most recently a rate of 5.375 percent when paying off our mortgage) rather than chancing an unknown rate in the stock market or getting almost nothing in a savings account or certificate of deposit.
Poor retirement fund choices
Some people have great retirement plan options available to them through their employer. When I worked in the hotel business, our retirement contributions were met up to 5 percent with about a 3 percent employer match. This was pretty much like a guaranteed initial return of 60 percent on my investment and was hard to turn down. Pair that with tax savings since contributions were pre-tax and it was pretty much a no-brainer.
However, once I left that role to become self-employed, and since my wife recently changed jobs, retirement contributions have no longer been matched. This lack of incentive made it much easier to pay down debt rather than contribute to a retirement plan.
More flexibility later
With paying off debt as a goal, we hope to open up more options down the road. Without debt sopping up our income, we might open doors to other investment opportunities that might not have been available had we other debt obligations.
According to creditloan.com, the average American's interest payments on debt is $600,000 over the course of a lifetime. Without such a huge sum soaking up our excess cash, we've already reached the dream of owning our home mortgage free, and we hope to eventually build up enough reserve funds to pursue goals such as buying land and maybe even getting the kids through college debt-free. It could also help us get to retirement in an overall better financial position. This is why we worked hard to rid ourselves of debt first in an effort to gain enough financial freedom to pursue other goals and achieve greater peace of mind.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Personal Finance - Career & Education