5 Good Reasons to Stop Paying Off Your Debt

If you’re ready to start improving your financial situation (good for you!), it’s pretty common to look at your debt as the first priority. The monthly payments put a strain on your budget, and you may simply resent your debt and want it gone as soon as possible.

It’s a great goal. The less debt you have the easier it can be to do some of the other things you really want to do with your life.

But before you go ahead and throw all of your extra money at your debt, I’d like to talk about a few things that you might want to think about doing first.

These certainly aren’t rules to live by, and if you would rather just kill your debt then by all means go ahead. But each of these five things have the potential to put you in a slightly better financial situation if you handle them before going into full-on debt destruction mode.

Quick note: While these things may be good to prioritize over putting EXTRA money towards your debt, it’s ALWAYS a good idea to pay at least the minimums on your debt before anything else. That way you keep your credit history in good shape and don’t hurt your chances of reaching bigger financial goals down the road.

1. Your employer offers a 401(k) match

One of the best reasons to put extra money towards your debt is that it offers a guaranteed rate of return. As an example, if you have credit card debt with a 15% interest rate, every dollar you put towards that debt is earning you a guaranteed 15% rate of return. Even the stock market likely won’t give you returns that high, and they DEFINITELY won’t be guaranteed.

But there’s one place where you can find an even better guaranteed rate of return, and that’s a 401(k) match.

Let’s say your employer matches your contribution up to 3% of your salary. That means that for the first 3% you contribute, you get an immediate and guaranteed 100% rate of return. Even if they only match half of your contribution, it’s still a guaranteed 50% rate of return.

Even the highest interest rate credit cards can’t compare with the guaranteed return of a 401(k) match.

2. You don’t have much in savings

I’m a big believer in building up your savings even when you’re in debt. It doesn’t how much interest you’re paying on your debt or how pathetic the returns are in a savings account. I still think it’s a good idea.

One of the most important habits that will help you stay out of debt over the long-term is having cash available to handle life’s little curveballs. Whether it’s a car breaking down or your best friend’s wedding across the country, having the money to pay for those unexpected expenses will keep you from having to resort back to a credit card.

$1,000 is a good initial target for this savings account. It’s enough to handle most of life’s more common unexpected expenses, and not so much that you’re losing out on the opportunity to pay off your higher interest debt.

Even if you don’t have anything in savings right now, you can get started by automating a small monthly contribution into a dedicated savings account. That account will build month after month and eventually you’ll have a nice little chunk of savings.

3. You are eligible for student loan forgiveness

If you’re enrolled in one of the income-driven student loan repayment plans, you may be eligible to have some of your student loans forgiven down the line. Depending on your situation, you may actually save money by only paying the minimums and having the rest forgiven.

This certainly won’t be true for everyone and definitely requires a detailed review of your personal situation before deciding which path will save you the most money. But there are a few guidelines that can at least help you start thinking about it:

• Each income-driven repayment plan has a different timeline for forgiveness. In general, the shorter the timeline the more likely it is that forgiveness will be helpful.
• In some cases the amount forgiven will be taxable and in others it will not. It will be better for you if it’s not.
• Generally, forgiveness will be most helpful for people who have a high amount of debt when compared to their income.

4. You are under-insured

I love insurance. I really do. It allows me to make sure that my family will always have enough money to keep paying the bills, no matter what happens to me. That peace of mind is absolutely worth paying for.

As painful as it is to add another cost to your budget, especially when you already have those debt payments to worry about, getting the right insurance in place will give your family the financial security it deserves.

Here are the types of insurance that new parents should focus on:

• Life insurance
• Disability insurance
• Health insurance
• Liability insurance

5. Your debt is low-interest

If you have low-interest debt, like a mortgage interest rate under 4%, you simply might be able to find better returns elsewhere.

The US stock market has historically produced returns of about 9% per year. Even bonds – which are generally a safer and more conservative investment – have returned just under 5% per year over the last 80 years.

There’s no guarantee that we will see the same results going forward. But it could certainly be a reasonable decision to invest your extra money instead of using it to pay off debt, with the expectation that you would get better returns and be able to reach your financial goals a little sooner.

The best path is the one you can stick with

Paying off your debt is always a great financial decision. The quicker you can get rid of your debt, the quicker you can relieve the stress is puts on your budget and the easier it becomes to work towards your other financial goals.

But before you dive in and start attacking your debt with abandon, I would consider the points above just to make sure you’re making the best use of your money. It may be that paying off your debt is still your top priority. But you may find that there’s something else you would rather do first.

In the end, the most important thing is finding a path that helps you reach your goals and that you can stick with. Hopefully this helps you do just that!