Many people use financial planning as a tool to steer themselves to a brighter future. When people speak with a certified financial planner, they often want to jump to the growth part of the story. However, paying debts is usually what a financial planner wants to talk about first. Let's examine why paying debts normally comes before investing and growing your money.
Debt Imposes Headwinds
Even if you're getting excellent returns, say 10% per year, paying on debts at the same time pulls that down. Likewise, debts are always dependable losses, but many investments aren't. While a good portfolio can kill it in a good year, it might take a beating in a bad year. In both years, though, the debt just keeps taking money out of you.
Debt is often treated as a bad word. It isn't. Debt allows people to finance their homes and cars, start businesses, and pay for schooling. Uncontrolled debt, though, is bad news. Paying down your debts doesn't just take those expenses off the board. It also allows you to assume future debts at lower interest rates. That means you can control your borrowing costs in the long run by paying debts today. With cheaper financing, you'll be able to invest and make more in the long term.
Out of control debts also leave a person with lingering bankruptcy fears. If you end up in bankruptcy, all your financial planning efforts will be for nothing. A court will expect you to use those assets to pay creditors. If the creditors are going to get that money anyhow, it's better to pay them today, build your credit, and avoid bankruptcy. Once your financial planning situation is on firmer ground, then you can invest.
Even if it is within your means to balance debts while making investments, there's something to be said for keeping life simple. By eliminating expenses and lowering your cost of borrowing, you'll have an easier time keeping track of everything.
The Right Debts Build Assets
Not all debt is created equal. If you pay off your mortgage, for example, your house becomes an asset that you and your financial planner can leverage. You might use the house that you own outright as collateral for a HELOC, a line of credit based on the equity you have in your home. That money can allow you to borrow for renovations and repairs, or you can even use it to cheaply finance a vacation, start a business, or even pay off more expensive debts.Share