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How to Kill Your Fear of Debt

Susannah Snider

After her husband nearly died from complications following surgery, Liz Gendreau and her family decided to become completely debt-free. The goal was to protect themselves in case something similar happened again, says Gendreau, who is 38.

After repaying high-interest debt, Gendreau tackled her mortgage by refinancing it for a 15-year term and at a 2.75 percent interest rate. Today, extra cash is held in a "mortgage payoff fund" that doubles as an emergency fund. "It can be used to pay off the mortgage in one fell swoop once it reaches the mortgage balance," Gendreau says.

While Gendreau, who writes about her family's financial situation on her blog chiefmomofficer.org, knows that repaying her mortgage may not be the most mathematically wise way to spend extra cash, it gives her peace of mind to know that a home loan won't hang over her family's head in another emergency.

"To me, it's more of a security thing than anything else," Gendreau says.

[Read: What Is My Debt-to-Income Ratio?]

Gendreau is not alone in looking to nix debt. Financial experts and money gurus like to extol the virtues of rapidly repaying debt. And they have a point. Interest payments are expensive, especially for high-rate loans such as credit cards. And neglecting due dates can result in penalties and fees.

But preaching a total aversion to debt can overshadow some of the mathematical complexities and nuances of savvy financial management. After all, most consumers have other goals outside of debt payoff, including funding retirement, saving for their kids' college tuition or building a robust emergency fund. Focusing on debt to the exclusion of these other goals can be a misguided financial strategy.

"To say all debt is bad ... that's too big of a blanket statement," says Shashin Shah, a certified financial planner and director at SFMG Wealth Advisors in Plano, Texas.

So while carrying debt may not feel great, it can be a savvy financial move when done in the service of other financial obligations. For example, if you're relatively young, have a 4 percent interest rate on your home loan and expect to earn 8 percent annually on your retirement investments over the next several decades, it might be worth directing extra funds toward retirement savings, not mortgage repayment. Or if you're considering heading back to school and need to take on a reasonable amount of student loan debt, it could be a worthwhile investment in your future. "All of it has to be looked at holistically," says Jamie Ebersole, a certified financial planner in Wellesley Hills, Massachusetts.

The idea here isn't that debt is good, but that you should be thoughtful and cognizant of the potential trade-offs when repaying it aggressively or avoiding it altogether. Here's what to know about kicking your fear of debt.

[See: 10 Easy Ways to Pay Off Debt]

Not All Debt Is Created Equal

If you're gung-ho about debt payoff, you know that not all debt is the same. "Interest rates matter," says Stephanie Genkin, certified financial planner and founder of My Financial Planner LLC in Brooklyn, New York.

Some experts like to classify "good" and "bad" debt. While that can be a simplistic way to label loans, and some obligations can fall into both categories depending on individual circumstances, it can be a helpful way to mentally classify your debt load. Consumers should almost always avoid carrying "bad" debt, such as high-interest credit cards, payday loans and high-rate auto loans. But "good" debt, such as a low-interest mortgage, a low-cost car loan or low-rate student loan, may allow you to benefit from slow repayment.

It's worth considering whether your money could be working harder for you in an investment account or emergency fund. "Leverage is a very, very big key," Shah says. For example, if you are appropriately leveraging a $200,000 mortgage, he says, you understand that you may be able to better utilize the $200,000 independently through investing or saving rather than shoveling it all toward your home repayment. You also understand that the home may be worth more in the long term than the debt ultimately costs.

Of course, Shah notes, there is a certain amount of risk to this. After all, your home or investments could lose money. But if you're staying in a home for a reasonable number of years and investing wisely for your time horizon, you can mitigate those risks.

Audit Your Debt

How do you know whether the debt you have is worth rapid repayment or can be de-prioritized in favor of savvier financial strategies? Do an audit of your debt to determine which loans carry the highest rates and which carry variable rates, meaning they could become more expensive as interest rates rise. Those are typically the debts you should pay off first.

On the flip side, when considering taking on new debt, think about the potential payoff. Carrying credit card debt, for example, is almost always a bad financial move. But borrowing to buy a house or attend a reasonably priced university may be a wise investment in your future. If you can manage the monthly payments in the future, those kinds of debt may be worthwhile.

Also consider your relationship to and ability to repay debt. If you have a toxic relationship with debt repayment or an inconsistent paycheck, perhaps repaying the debt obligation is the savvier move, even if it is low-interest debt, because you know you can't handle those payments unless you're doing it aggressively. But if you are responsible with debt, have a good credit score and think your money can work harder for you in other ways, it's worth thinking twice before speeding up repayment, experts say.

Consider Savings Goals

Debt payoff is an admiral goal, experts say, but don't forget that other financial goals are important and may need to be balanced with aggressive loan repayment. Experts note that investing can be intimidating and feel risky compared to debt repayment, which feels like a guaranteed return. "People don't know how to get started with investing, and they see daily stock market reporting of ups and downs, and it seems like a dangerous place out there," Genkin says.

Funding a retirement account is one important financial must-do, and the earlier you can start investing in your retirement fund, the longer you'll have to let the interest compound. "The question is: Can you make more with your money than your debt service?" Shah says.

[see 20 Financial New Year's Resolutions for 2019]

Consider Your Life Stage

Your age and proximity to retirement can impact your approach to debt. "There is a time when it does make sense not to carry debt," Shah says. "We don't believe carrying a big mortgage into retirement makes a lot of sense."

If you're just starting out, it may be fine to slowly repay mortgage debt or student loan debt in order to meet other goals, such as building an emergency fund or retirement account. But as you age into retirement, paying down debt obligations is often a more fitting goal. The bottom line is that you need to evaluate what makes the most sense mathematically, emotionally and financially, then thoughtfully select your approach to debt.



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