Maaaaaarghch. We got nothin’. Monosyllabic. Not punny. The only thing mildly related is “March of Dimes”, and that has been well taken already. So without further ado, let’s continue our 2019 series in content, if not title.
“Here” looks like different things to different people. For some people, “here” might be increasing that emergency fund to 6 or even 12 months’ expenses. Nothing wrong with that, but you know what you’re doing now, so keep at it and revisit this article when you’re happy with your emergency fund.
For others, “here” is about making your money work for you, which usually boils down to a question of which takes priority: saving/investing or paying down debt? The answer is, like so many other things, it depends on your personal predilections.
It’s not uncommon to see some best-selling personal finance gurus advocating some kind of zero-debt strategy. Like, pay off all your debt (including your mortgage!) before saving any money, or buy a house with cash only, or never use a credit card and only use debit cards…that kind of thing. That’s a very conservative option that is guaranteed to keep you out of trouble and may be the best bet for some people. But we tend to disagree.
Debt is not in and of itself the devil, as some would have you believe. Debt can be good. Debt can be productive. Debt can absolutely get you in massive, massive trouble, too. But so can a lot of things. Fun fact: all the money that you have in your bank account is considered a debt to the bank that has it. They take those deposits and use them to make loans, and they get a higher rate of interest on their loans (assets) than they pay you for your deposits (debts). That’s how banks make money.
That’s also how the vast majority of companies in the world grow. They take on debt and (ideally) use the money to invest in productive assets that return more than the cost of the debt. There’s no reason you can’t do the same thing.
For example: take out a home equity line of credit to remodel your kitchen before selling your house. That home equity line is debt, it charges you interest. But the expectation is that you will make more by improving your kitchen than you will pay in interest, so it makes sense. It’s the same idea with your money more broadly.
Let’s say you can get 8% returns by investing your money in the stock market. If you’re paying 18% interest on a credit card balance, by all means pay off the credit card balance! But if you’re paying 2% on a car loan, you’re better off not paying off that debt more quickly and instead investing the extra money.
What about a mortgage at 4%? Well, that’s where the personal preference comes in. From a strict numbers standpoint, 8% is greater than 4%, so you’re net positive if you don’t pay down the mortgage and instead invest the money. But stock market returns aren’t guaranteed and that 4% is, and owning your house free and clear is definitely worth something...but just how much is up to you and will vary person to person. Hence, it depends.
Want some help figuring out the best way to pay down debt while also working towards your other financial goals? Drop me a line at firstname.lastname@example.org and we’ll find some time to get together.
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