Thursday, December 8, 2011

Should you pay your debt or invest for retirement?

The answer to this question in today's market is extremely simple, pay your debt. No matter what the current rate of interest you are paying on your debt, it would be extraordinary if you were getting even a small percentage of that rate on any of your investments. There are always those who will try to lure you into further debt by promising high rates of return in a market where banks are paying, at most, 1% or so in interest, if that. Here is a quote from the BYU's Human Resource Services that is very sound advice:
People often ask the question, "Should I pay off all of my debt before I start saving for retirement?" At first glance, this may seem like a very difficult question. However, by considering a few simple concepts, you can make the right decision for your situation.
As a general rule, whether debt is a mortgage, car loan, student loan, credit card or medical bills, all debt should be retired as soon as possible! The feeling of living debt free for life is certainly worth the sacrifice required to reach that goal. Everyone should be debt free before retirement. However, the question remains, should a person commit all available funds towards paying off debt at the expense of saving for retirement? Understanding the two types of debt will make your decision easier.
On one end of the debt spectrum is high-interest, nonproductive debt such as credit card debt that originates from credit cards and department store charge accounts.
Nonproductive debt is financially destructive and should be avoided. If this type of debt is necessary for short periods of time, the debt should be paid off as quickly as possible. The other type of debt is productive debt such as a mortgage and reasonable debt for education, transportation or the cost of doing business. Productive debt is an investment and the interest paid is often tax-deductible. Productive debt can be paid off over time as long as the interest rate is reasonable and the debt is paid off before retirement. (emphasis in the original)
The only thing I would change in the above is that paying of your mortgage should be a priority from the day you purchase a house. In today's falling real estate market, moving is not usually a good option, whether you have a mortgage or not. In an unstable economy, if you own your home without a mortgage you will at least have a place to live. 

As Brigham Young said, “Pay your debts, … do not run into debt any more. … Be prompt in everything, and especially to pay your debts.” (Discourses of Brigham Young, comp. John A. Widtsoe, Salt Lake City: Deseret Book Co., 1954, p. 303.)

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