Comments on: Pay off Debt or Invest for Retirement

By: Tim

Tim — Fri, 23 Feb 2007 20:26:16 +0000

i’d definitely invest something, anything if your company provides matching funds. I’d still establish a habit of a small retirement even if my company did not provide matching funds. moreover, you reduce your tax burden by contributing to 401k or RIRA and/or get tax credit for RIRA depending on your situation. The problem with the purely numbers situation between debt @ higher interest rate or savings @ lower interest rate, is the fact that you need to est. good post-debt practices.

Additionally, you need to save for an emergency fund. you do not want to have to go more in debt or have to take very evasive measures like bankrupcy, while you are trying to get out of debt. You are setting yourself up for failure by not giving yourself some cushion for car or house repairs, medical/dental visits, and insurance losses.

Will you it take longer to pay off your debt if you do this? Yes, but it is necessary to balance debt repayment with not worsening your debt situation. From a purely numbers point of view, it makes sense to pay off higher credit card debt rather than putting away money in a savings account with less return for an emergency fund or something aside to est. a retirement fund basis. However, from a very practical and realistic point of view, this is very necessary.

Also, having something, anything that is semi-liquid like money for retirement and pre-pay monies, helps you live within smaller constraints.

Clever Dude, I’m with you on this. I had over $80k in unsecured debt (non-mortgage/non-educational). During the climb out of debt, if I had not given myself a buffer I would have had to file for bankrupcy and more than likely lost my job.

By: Clever Dude

Clever Dude — Fri, 23 Feb 2007 19:51:45 +0000

I’m glad you put in the psychological aspect of paying off debt. If you’ve never had a mountain of debt (I have $75,000 NON-MORTGAGE debt alone), then you just wouldn’t understand the stress and anxiety of it weighing down on you.

My wife and I make a lot of money, but it’s still going to take over 2 years to pay off this debt, at best. You’ve commented on my recent posts about trying to get out of debt and saving money on our vehicles, so you know my own position.

I agree that there’s no safe investment, so when I compare my debt and investment rates, I look at low risk investments like CDs and money market accounts rather than stocks. Right now, most of my debt is above the CD rates. Hence why I’m paying off debt first (while still stashing some emergency funds away when I can).

By: My Financial Journey

My Financial Journey — Fri, 23 Feb 2007 19:25:14 +0000

I agree and I would only condone it for student loans and possibly argue that now paying off your mortgage ahead of time would be the only two cases where you should ever have money in the stock market instead of paying off debt.

By: JohnR

JohnR — Fri, 23 Feb 2007 17:27:15 +0000

Unless you are talking about somehting like a student loan that is fixed at a really low interest rate and you can invest the money at a rate that is garaunteed higher, I think it is always a bad idea. Investing money when you have debt at a higher rate is like buying stock on margin. You are investing money you don’t own.

By: traineeinvestor

traineeinvestor — Fri, 23 Feb 2007 14:15:52 +0000

It’s an interesting issue. I put up a series of posts on this topic over the last few days.

The bottom line is that not paying down debt and investing the additional money increases the potential returns. It is not a risk free proposition for the simple reason that there are seldom (if ever) investments available which are guaranteed to produce returns greater than the cost of the debt. Managing and living with the consequential risk can make life….interesting.