Most people who achieve debt-free status are motivated by the desire to have more savings. Having no debt allows them to focus on investing their extra funds and having more peace of mind about their finances.
Unfortunately, paying off all of your debts may not be the best idea. It depends on the type of debt that you have, the interest rate, and your overall financial goals.
Examine Your Current Debt & Interest Rates
Some debts have higher or lower interest rates than others. For instance, mortgages and student loans typically charge lower interest rates than credit cards.
Although it’s a no-brainer to pay off credit card balances, Lum advises people to keep in mind that other low-interest loans can also be beneficial.
Look At Investment Returns
If you have a mortgage, it’s important to consider the returns that you could get by investing in the stock market instead of paying off your debt faster.
According to Lum, the lower interest rates on mortgages are making it easier for people to invest their excess cash. He noted that people could earn more by investing rather than paying for loans.
Look At Financial Values
Although experts agree that it’s generally a better idea to invest your extra cash instead of paying off debts faster, some people still consider having a debt-free home to be incredibly valuable.
Having a mortgage is a huge burden that many people carry, and paying it off can signify a huge amount of pride and security. Once it’s taken care of, it can also open people up to various opportunities. For instance, if you’re able to spend your extra cash without worrying about the large amount of debt that you have, you might take on more risks in your career.
Ensure You Have A Emergency Savings Account
One of the most important factors that people should consider when it comes to paying off their debts is having an emergency savings account. Having this type of fund can help them manage their finances in the event that they need to make a sudden trip to the emergency room or lose their job. Unfortunately, relying on credit cards or loans to cover unexpected expenses could actually worsen your financial situation.
Ideally, people should have six months’ worth of expenses set aside in an emergency fund. However, this may not be realistic if they’re also dealing with debt or if they have a hard time managing their finances. If they have a hard time saving, aim to set aside three months’ worth of expenses instead. Having a small emergency fund can help people manage their finances, and it can help them get back on track once their debts are paid off.