A “ four letter word” for sure; but not a dirty word; even though there are those who would have you believe differently, like it’s a pox or plague. I’m of a different mind. I learned long ago that debt is a fact of life. Try raising a family without use of a credit card, own a home or auto without a loan; even obtaining a college education requires going into debt.
Maybe you’ve heard the story of an old woman, wanting to stay in her home, spent every cent on paying off her mortgage, proud that “no one can take her house”; even though she has little to fall back on to maintain it or herself. Or, the person, so consumed with being debt free, stays in a hated job so as to “pay off the house”…but neglected to save enough for retirement.
These are extreme examples, of course, but think about it…managing the debt could have, perhaps, offered more choice or a better outcome. Debt consolidation, for example, can free up additional money, lower the overall interest paid and allow for contributing to a college savings plan or retirement
Student loan debt is a hot topic today. Young people find themselves mired in debt before they find their first job after graduation. Yet I hear over and over again,” I want to pay off my student loan” as soon as possible. But why would anyone do this?? These loans can carry a low interest rate and 10 to 15 year repayment. Not to mention, they carry a feature you can’t find elsewhere, called Income Based Repayment, where the monthly payment is capped at a percentage of income or the Graduated plan which allows for lower payments in the first few years and then the payments are increased every few years until repaid. With so much more needed in those first years after college, one could be better served making only necessary payments to student debt, avoiding default, and using any other monies to establish a life and career
For the homeowner, a common and useful way to manage debt is Home Equity. With Home Equity loan rates low and terms of repayment longer, this can be a useful tool in accomplishing your financial goals, even reduce the total cost of borrowing.
Might it have been better for the old woman to obtain a Reverse Mortgage and be able to provide for herself, all the while staying in her home? Or, making a decision to obtain a Heloc (Home equity line of credit) or Mortgage Refi might have freed up enough money to provide a retirement nest egg, once the “house is paid off”.
Businessmen use debt as a tool every day. Auto dealers don’t “own” all the cars on the lot…they pay monthly to the manufacturer. Their goal, of course, is to make more on sales than it costs. So, what about us? What about borrowing to invest? That’s nuts, right…wrong!! Call it “pre-saving”. You know you can save monthly and you have a goal in mind, but it will take years to get there. Enter the HELOC. Why not let your homes’ equity provide a “nest egg” to invest at a favorable rate, while your monthly savings repays the loan (at a lower rate). Home equity rates are currently at 3.5- 4% and a return on investment of 6% is not hard to find. Skeptical??? Just remember, so long as your investment remains untouched for other purposes, (after all, that’s the purpose of a “nest egg”) you can enjoy 2% interest yearly as shown by the above example. And if the ability to save (repay) is interrupted, the loan can be satisfied month-by-month from the investment itself, but leave the remaining balance invested to continue to grow.
So, do your homework, FIND WHAT WORKS FOR YOU; review your debt, the percentage rates you pay, the length of time to repay. Be better informed, and then MANAGE your debt.
Cents Maker