Even with­out TEOTWAWKI we are all hurt­ing in the wal­let these days. And the prog­no­sis isn’t look­ing good for some time to come (at best).

All forms of per­son­al finan­cial media are filled with arti­cles and advise about how it is soooooooo impor­tant to pay down your debt. It is a worn out mantra.

Worn out or not, I 100% agree with the con­cept. Espe­cial­ly high cred­it card and oth­er revolv­ing cred­it line debt. And even with today’s low mort­gage rates owing your prop­er­ty out­right is def­i­nite­ly not a bad thing!

Can’t argue against it.

But there is also a real­i­ty check that has to be con­sid­ered.

Pay­ing down debt at the exclu­sion of all oth­er dis­cre­tionary finan­cial activ­i­ties may not be the best approach in all cas­es. That is, putting every last spare dime to pay­ing debt pre­cludes alter­na­tives such as mak­ing invest­ment deposits, fund­ing a spare cash/emergency cash account, pro­tec­tions such as insur­ance etc.

Finan­cial plan­ners and num­ber crunch­ers are quick to offer up math­e­mat­i­cal mod­els they claim show the “return” on pay­ing debt is bet­ter than most invest­ments. This is based on the par­a­digm that pay­ing off debt is the best “invest­ment” you can make.

And it is a false par­a­digm.

Repay­ing debt is not an “invest­ment”. Nor is it a “sav­ings”.

Don’t jump all over me. It has already been stat­ed in the arti­cle that repay­ing debt is not a bad thing.

But there is no “return” on repay­ing debt. Not in a prac­ti­cal, spend­able sense. If you have a cred­it card at 10% inter­est you are not get­ting a 10% “return” on your mon­ey when you pay it off. Nor are you “sav­ing” 10%. At best you are reduc­ing your future antic­i­pat­ed inter­est pay­ments (as well as reduc­ing your over­all indebt­ed­ness). While this does improve your cash flow it is not yet cash in your pock­et until the future comes, you have the cash in hand to make the for­mer debt pay­ment and you don’t have to make a pay­ment (or at least as large a pay­ment as you oth­er­wise would have).

A “return” implies you are receiv­ing some­thing of val­ue back for what you have paid in that can be used to pur­chase some oth­er prod­uct, ser­vice or invest­ment. While reduc­ing your indebt­ed­ness is cer­tain­ly a good thing it has no spend­able val­ue. You can’t take a hand­ful of non-indebt­ed­ness or reduced debt to the store to buy gro­ceries. The only way to get spend­able val­ue out of debt reduc­tion is to draw back again on your cred­it there­by adding back to your debt! Catch-22.

Nei­ther is pay­ing down debt a “sav­ings”. You already planned to spend the mon­ey to repay the debt (pre­sum­ably).  If the debt is reduced or elim­i­nat­ed that mon­ey may be freed up to spend on some­thing else but it is not new-found/earn mon­ey. One way or anoth­er it would have been there any­way. How you spend it – repay­ing debt, mak­ing pur­chas­es, invest­ing, etc – is irrel­e­vant. The total does not change.

Once again please make no mis­take, I am not advo­cat­ing against repay­ment of debt or becom­ing debt-free. Sim­ply the sin­gle-mind­ed­ness of debt reduc­tion has to be tem­pered with the real­i­ties of life.

Even if it does take longer and cost a bit more to extend debt repay­ment there are very prac­ti­cal real-world rea­sons for choos­ing not to plow every­thing in your pock­et into debt reduc­tion. Clear­ly this is open to much adjust­ment based on each per­sons’ indi­vid­ual needs and sit­u­a­tion. Def­i­nite­ly not a one-size-fits-all approach.

But nei­ther is blind obe­di­ence to debt reduc­tion.


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