“If you find yourself in a hole, STOP DIGGING.” -Will Rogers
Last time we talked about creating a budget being the first step in getting your money right for retirement. Today we address the importance of paying off debt.
Debt is something (in our case, money) that you owe to someone else. People often like to break debt into two groups: good debt and bad debt. Good debt is anything that could be considered an investment because it will increase in value or bring money to you in the future such as a student loan, home mortgage, real estate property, or a business loan. Bad debt is something that depreciates in value (like a car) or ends up costing you more money over the long term (like a credit card).
In the article Good Debt vs. Bad Debt, Investopedia makes the argument that there really is no such thing as good debt. Taking out a student loan to get a degree does not guarantee you’ll get a good high-paying job. Real-estate and the stock market values can both be volatile, rising and falling based on a variety of conditions.
The reality: debt is debt.
Any money that you are paying towards debt, especially high interest debt, is money that you can’t use for savings. Credit cards, car loans, and some mortgages are the worst offenders and it’s best to tackle those first. If you are able, it may be a good idea to consolidate your credit card debt so that you have one lower payment. Another strategy often suggested is to pay off the smallest debt first, while applying a minimum payment to all other debt. Once that debt is handled, tackle the next smallest bill adding to your current payment the money you were paying on the first debt. Continue this until all your debt is paid off.
It doesn’t really matter what strategy you use as long as you are consistent. Small actions over the long term will yield the results your want. And finally, try really, really, really, really hard to stop acquiring new debt. You’ll never get out of the hole, if you continue to dig. Learning to delay gratification and save for things you want is a good habit that will serve you well in retirement.