Yesterday I revealed that carrying debt is making me sick (not figuratively, but physically). I am impressed that I confessed this truth about myself: debt makes me sick.
In my situation, it is better to be paying off my debt faster than worrying about my retirement savings. My statement (as has many of my commentators) is that this choice is personal. You should choose the method that makes you comfortable.
What other reasons make paying my debt or Mortgage off a better choice for me?
Investing in RRSP or TFSA is Better Started Early
While this is true, it also assumes you know how to invest and where to put your money. For my regular readers, you realize my early endeavours in the area of investment have been, at best mediocre. At times disastrous (remember my top 5 investment regrets). If I had put the money I had “invested” into my debt, I might well be much better off.
If you are confident in your ability to invest or have a system you think you can rely on, starting your retirement savings early is a good thing (if you don’t carry debt already).
Early Retirement is an Option
This is not likely, for me. I may come into a considerable amount of money, but I think retired would be a relative statement. I would do volunteer work full-time instead. The difference is I have a very young son, and by the time I am 65, he will be 21. I guess I will need to keep an income of some kind (other than retirement income) for a lot longer than I thought I would take ten years ago.
Debt Reduction as an Investment Vehicle
The best investment I can make right now is on my debt since I can figure out exactly how much money I will save by paying it down, whereas I couldn’t tell you what the price of any stock might be in 6 months. Given I am paying about 5% on my debt vehicles, I know I am getting at least that much money in savings on the money I am settling into it (i.e. I am paying that much more on my principle).
As I have been saying all along, debt repayment is a much better thing for me to be doing at this moment in my life. I have some equity invested in my retirement (not nearly enough, I know, but some); however, the ill effects of carrying debt and my aversion to that fact point me towards a more aggressive payback schedule for these debts. Whether this plan of attack can be fully implemented remains to be seen, as the only way to tell if a project was successful is to look back after its implementation.
I am always open to hearing about personal achievement stories in these areas. Please feel free to leave a comment about your successes (or failures) in this area.
Good points Al. After reading The Richest Man In Babylon, i was inspired and started focusing all new money on debt reduction to alleviate stress and risk.
I’m all for paying off debt too, and it’s not just an emotional response. Here’s why:
1) As you mentioned, it’s a gauranteed rate of return.
2) Leverage is risky. Paying it off eliminates risk.
3) Alternative investments to paying off debt are getting poorer and poorer. Fixed income is at ridiculous lows, and then gets taxed unless it is sheltered in an RRSP. Equities are risky, and can involve alot of fees.
4) The numbers that are used by the ‘start investing early’ crowd are questionable. Compounding rates at 8 or 10%. Sure, maybe if you cherry pick your data points. They’re also provided by people that make money both when you invest (fees) and carry debt (interest).
I do have investments because my debt load is getting minimal, but my debt load is minimal because I put a priority on paying it off. And of course I have more free cash flow to invest because I’m not throwing away money paying interest.
That’s the crazy think about money. You can analyze, calculate numbers till your blue in the face, but if you have an emotional disconnect to the outcome, it can be very detrimental. I have made several investing mistakes myself and the best decision I ever made was purchasing Manulife’s whole life policy several years ago. As a broker it may seem odd but I wanted something that would make a steady return (7-8%) and I can’t stop investing, make ill timed investment decisions. The policy is going to be my personal pension and this peace of mind allows me to have more enjoyment emotionally with my investments that I invest as the pressure is off to always be right. It’s always easy to say buy term and invest the rest, but much harder to implement without fail over 30 years. My decision will probably not make sense to most of your readers but it is one that has improved my emotional and physical health.