Sometimes it’s not worth paying off debt?
September 28th, 2005 | by mbhunter |Seems like most of the highlighted articles on MSN.com are from Liz Pulliam Weston the past couple of weeks or so. (At least the ones that caught my eye.) The latest: When paying off debt is a bad idea.
Basic ideas:
- Of the debts you pay down (pay more than the minimum due), pay your mortgage down last.
- Make sure you at least get your maximum match out of the 401(k) before paying down debt.
- Don’t raid your retirement savings to pay down debt.
- If you’re going to declare bankruptcy anyway, throw in the towel.
These are very abbreviated versions of what the article talks about.
I was happy that she didn’t advise against paying down one’s mortgage early. She did say that other debts should be paid before paying down the mortgage above and beyond your regular payment, but that makes sense — usually the other debts are at a higher rate, and for many of those debts you won’t be in danger of foreclosure if something bad happens and you can only pay the minimum.
Regarding the last point, I guess that a bankruptcy is a bankruptcy, regardless of how much debt is dismissed. With tougher bankruptcy laws around the corner, repayment of the debts is going to be more common than walking away from them because of the means test. So, just because bankruptcy is on the horizon doesn’t necessarily mean that repayment doesn’t matter — you’ll end up paying it back later anyway.
It all boils down to where your money works the hardest. A maximum match in your 401(k) is working pretty hard. Contributing more than is required for maximum match? Still works hard, but it doesn’t have the “leverage” of your employer’s match. Full Roth IRA contribution is working pretty hard. And paying off consumer debt is working very hard. After all that, paying off mortgage debt is working hard.
The MSN article is good if you get these points from it.
