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.