Chipping Away - Busting Debt in Boston

A personal finance weblog about my own journey to eliminating my debts and building net worth. Hopefully this will serve as a place for me to share and discuss my strategies and ideas, as well as keeping me on track and focused.

7/13/2006

Debt Reduction - When to Change Gears?

I just read a good post over at A Penny Saved... which in turn linked me to a post on Mighty Bargain Hunter's blog entitled "Why is being debt-free so unpopular?"

I wanted to take a second to point this out because the combination of those two posts got my brain wondering about when enough is enough, and when it's time to start shifting my main focus away from simply hammering down as much of my debt as possible and when to start looking more at saving/investing those would-be debt reducing payments. Right now, I have it in my head that until I've reduced my debt to zero, I don't really have any reason to be thinking about somehting like home ownership or investing...

Now, I know what the financially savvy of you are thinking. It's pretty simple math, right? If an investment vehicle offers a higher rate of return than the interest rate on a particular debt, you're better off making the minimum payment on said debt and putting the remainer would-have-been-payment money into the investment. Oversimplified, I know, but that's the basic idea and it makes sense at face value.

However, the picture gets a little muddier if you consider that not all investments have a guaranteed rate of return (in fact, anything reasonably high probably isn't), and muddier still if you want to include the psychological effects that debt vs. no-debt has on you personally. If you're the type of person that can logically understand the fact that your investments are making you mroe money over the long haul than the loss you're taking to interest, then by all means invest away. But if that's a stretch for you and having debt hanging over your head is more worrisome (as I suspect is where most of us live, mentally) it might be a better idea to stay focused on becoming debt-free so you don't get distracted by your debts and allow that to affect your savings and investment goals.

I think there's probably a lot of gray area in there, and lots of points to reasonably start switching gears from aggressively paying down debt to focusing more on investing/saving, it's just a matter of where you're comfortable with it personally. As for my switch-point? I'm not 100% sure, but I'd definately like to hear some opinions on the matter.

2 Comments:

  • At 7/15/2006 1:45 PM, Anonymous thatedeguy said…

    The thing to remember here is that each of us has his/her own finanacial plan. In my case, my student loans are locked in at 3.75%. There is no reason that I would ever make more than the minimum that they ask for. I can deposit that money into a high-yield market account and make nearly 5% on it. That's a 1.25 margin. Not great, but it's money in my pocket instead of in theirs.

     
  • At 7/17/2006 7:08 AM, Blogger ChippingAway said…

    That's a great point, and actually leads into a post I'm making in a couple hours when I get a spare couple of minutes.

    Thanks for reading!

     

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