There’s
a lot to be said for paying off your debt and living debt free. But
should you really work hard to pay off all of your debt right now?
High interest consumer debt vs. other debt
Too
often, we lump all debt together and call it “bad.” And while there is
an argument that there’s no such thing as good debt, the truth is that
some debt is worse than other debt.
High
interest consumer debt is the worst type of debt. This is money owed on
things that we consume — things that don’t retain value and don’t
provide the hope of income or some type of solid return later. Not only
do you pay for something that won’t have the same value a year from now
(or that might be totally gone a year from now), but you also pay a high
rate of interest on it.
Credit
cards are a good example of this, since credit card debt often (but not
always) results from purchases made for consumer items like clothes and
electronics. High interest consumer debt doesn’t offer you the chance
to build assets, and you almost definitely won’t receive any sort of
return; you’ll just be paying high interest charges into someone else’s
pocket.
Other
types of debt aren’t quite so terrible. While there’s a growing concern
over student loans, and student loan debt can keep you down, it isn’t
the worst thing out there. In fact, when used carefully and judiciously,
student loans can help you get the education and skills you need to
boost your earning power over time. Student loans often come with lower
interest rates than consumer loans, which means you pay less for the
privilege of borrowing.
Depending
on how you use low interest debt, you can see a return, whether it’s a
mortgage or a business loan. But you have to be careful not to get
carried away to the point that your low interest debt turns into a
burden, rather than a benefit.
Choosing to put off paying a debt
Not
too long ago, my mom asked me why I wasn’t putting as much as I
possibly could toward my student loan debt. My answer was this: the
fixed interest rate on my student loans is below 2 percent. I’ve been
able to manage better returns than that on my investments. My annualized
returns on my conservative retirement account have even beat that—
recession and all.
Some
debts are a little more urgent than others. You’re probably not going
to earn 18.99% on your investments, so paying down credit card debt
makes sense. But if you have low interest, non-consumer debt, you might
think twice before retiring it.
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