Paying off debt is an important step for many toward financial security. For a long time, it was my primary goal. But now I’ve paid off student loans, medical bills, and other consumer debt I had for years, and I’m in a much better place financially. So I have switched my focus away from worrying about how to eliminate debt.
That means when I bought a new car in 2019 after my previous car was totaled in an accident, I didn’t use the full amount from the insurance company for a down payment. Also, when I buy a house next year, I plan on putting down only the minimum required by the lender. And I have no plans to pay off either loan more quickly than the predetermined repayment plan.
Here are some of the reasons paying off debt is no longer a priority to me, but also when it might be a good idea to focus on paying down your debt.
Why paying off debt isn’t a priority for me
Before I get into my reasons, I want to acknowledge that I’m in an incredibly fortunate position to turn my focus away from debt and toward other financial goals. I’ve never had credit card debt, and my student loan balance when I graduated was just $9,000.
I recognize my situation is not the norm, but I do hope it can be achievable for many. I spent several years with next-to-no savings and trying to cope with financial stress about debt. So if the approach I’m explaining doesn’t work for you today, consider that it may in the future.
I’ve never fully bought into the idea that all debt is bad. But for a long time, I wanted to pay off my debts as quickly as possible because I hated being beholden to a lender. In college, I worked full time while attending classes full time so I could avoid student loans as much as possible. When I bought a car for $4,500, I paid it off within six months.
When I bought my first house, I used a 0% APR credit card and a no-interest loan from an appliance dealer to pay for a lot of the expenses that growing into a new home requires. But although I had plenty of time to pay both debts back — and I wasn’t paying any interest at all — I still paid off both balances long before I needed to in spite of the fact that doing so didn’t save me any money.
But now that I’m a more secure financial position, my perspective has changed. Here are the reasons why I no longer focus on paying off debt:
- I have great credit. My credit score hovers around 800, which means I always qualify for auto loans, mortgages, and other financial products. Although I’m still paying interest on these debts, it’s not financially crippling because of the terms my good credit lets me qualify for.
- My emergency fund is more important. For all the years I spent focused on paying off debt, I neglected my emergency fund. It had a few thousand dollars in it, but it was nowhere near what I’d need if I experienced a major financial emergency. And if something did happen, there’s no way I could get all the extra money back that I had paid my lenders by paying ahead on my debts. Now, I’m willing to pay a little extra in interest for the security of having an ample safety net.
- I can leverage low interest rates. When I bought a home a few years ago, the interest rate on my mortgage was 3.25%. And when I replaced my totaled car last year, my credit union gave me a 3.49% APR. In contrast, the average 10-year stock market return for the past 140 years is 9.2%, according to Goldman Sachs. As a result, I can expect to get much more value from investing my money than from using it to pay off low-interest debts. Even with short-term market declines, I’ll be in a better position in the long run by focusing on investing versus debt reduction.
- I avoid high-interest forms of credit. Despite using credit cards for over a decade, especially to rack up millions of points and miles, I’ve been fortunate to never pay a dime in credit card interest. And because I’ve managed to build a successful career as a freelance writer, I haven’t needed to take out loans for other things, including during my divorce.
There’s some disagreement among financial experts about whether it’s a good idea to invest instead of paying off debt, even if that debt carries a low interest rate. After all, despite solid long-term returns, the market has ups and downs, and sometimes the downs can last quite a while. Fortunately, my investment goals are all long-term. I’m still a few decades away from retiring, so I don’t have to worry too much about short-term returns yet.
Let’s look at some math to illustrate why I think investing is more valuable than paying off my debt:
- If I were to buy a $250,000 home and qualified for a mortgage at a 3.5% interest rate, my monthly payment would be $1,123. I’d pay $154,280 in interest over 30 years.
- If I put an extra $200 toward my monthly mortgage payments, I’d save $40,194 by the time I paid off that debt.
- However, if I invested that $200 every month and got a 9.2% average return over 30 years, my investment account balance would total $353,914.
- That means you’d be leaving $313,720 on the table if you prioritized your mortgage over your retirement or another investment account.
So if you can afford to invest instead of paying off low-interest debt, it’s well worth it.
When it’s a good idea to pay off debt
Not everyone has the luxury of being able to focus on other financial goals instead of paying off debt faster. Here are some situations in which it makes more sense to make your debts a priority:
- You have high-interest debt. I can justify investing instead of paying off debt because I have low-interest loans. But if you have credit card debt or other high-interest debt, you’ll benefit more from using your money to pay that off.
- You personally value being debt-free. Even if you’re in a position where you can prioritize other financial goals instead of paying down debt, you may still want to focus on your debt, and that’s valid. Each person has a different perspective on how to handle their personal finances, and if being debt-free is important to you, don’t let what other people are doing change your mind.
- You’re behind on payments: If you’ve missed some payments, you may already be experiencing the consequences with damage to your credit score. But the longer you allow loans or credit cards to go unpaid, the more it will hurt your credit. If you can manage to focus on making extra payments to get current, it will help you get back on track and save you money in the long term.
Of course, it’s possible to juggle more than one financial goal at a time. While I was prioritizing debt payments for several years, I was still getting my full employer match on my 401(k) plan, and I tried to save a little here and there into my emergency fund. As you consider your situation and your financial goals, you’ll get a better perspective on the order of your priorities.
How to get started paying off your debt
Figuring out how to pay off debt can be challenging because everyone’s situation is different. Although some methods work for certain types of debt and credit profiles, they may not be possible for others.
Here are some potential solutions to consider to get started paying off your debt:
- Create a budget. Budgeting is one of the simplest ways to improve your financial situation because it gives you the information you need to make good money decisions. A budget will help you understand exactly how much money you’re bringing in every month and where it’s going. Depending on how you spend your money, you may be able to cut back in certain areas and use that cash to pay down debt faster instead.
- Consider a balance transfer credit card. If you have credit card debt and good credit — that’s generally a FICO score of 670 or better — you may be able to get a balance transfer card. The best balance transfer cards offer introductory 0% APR promotions for up to 18 months, giving you plenty of time to pay your debt interest-free. Just keep in mind that some of these cards charge a balance transfer fee of up to 5%, but the interest savings generally outweigh that upfront cost.
- Look into debt consolidation loans. If you don’t want to get another credit card, you may also consider using a personal loan to consolidate your debt. Personal loans carry lower average interest rates than credit cards, but don’t expect a 0% APR deal. Personal loans also offer a set repayment schedule with a fixed amount due every month, which you won’t get with a credit card, so a loan may be especially good if you’re struggling with motivating yourself to pay down your debt faster and are currently only paying the minimums on your credit cards.
- Turn to a credit counselor. If your credit situation makes it impossible to get approved for a balance transfer card or an affordable personal loan, it may be worth it for you to go to credit counseling. Credit counselors can help you determine the best approach to your debt, and they can also set up a debt management plan. For what is typically a modest monthly fee, you’ll make all your payments to the credit counseling agency, and they will pay your creditors. The agency may also be able to negotiate lower interest rates and monthly payments on your behalf.
- Us the debt avalanche or snowball method. If you don’t want to take out a different debt tool just to pay down debt, consider one of these approaches. With both, you’ll start by simply making a list of your debts. Then you’ll make the minimum payment on all your debts except for one, to which you’ll add extra funds every month. Once that debt is paid off, you’ll take what you were putting toward it and apply it to the next balance on your list, and so on until all of your debt is paid in full. The only difference between the two methods is that the debt avalanche method focuses on balances with the highest interest rates first, and the debt snowball method prioritizes accounts with the lowest balances.
There’s no single best strategy for paying off debt, so take stock of your situation and research all your options before you make a decision.
Paying off debt was extremely important to me for a long time. But as my financial situation has improved, I’ve gained the ability to prioritize other financial goals that are more important to me now.
As you consider your financial priorities, make sure you have an understanding of where you stand. Check your credit score and make a budget to get a good picture, then determine your next steps based on what’s most important to you and what you can afford to make happen.