Can you be too focused on paying off debt?

It’s probably my Lutheran upbringing that makes me wary of extremism in any form. Moderation in all things, doncha know.

Lately, I’m noticing extremism when it comes to paying off debt.

People think they’re doing the right thing by targeting student loans and mortgages for early payoff. But they could be hurting themselves if they’re stinting their retirement funds or leaving themselves with too little financial flexibility.

Let’s take student loans. Their interest is tax-deductible. If they’re federal loans, they have fixed rates and a number of consumer protections, including the ability to delay payments if you run into economic hard times.

Once you prepay those loans, though, the money’s gone. You can’t borrow it back, as you could with a line of credit.

I just heard of another family that rushed to pay off student debt, only to face an emergency fund on fumes when the father was furloughed.

Mortgage pre-payers face a similar problem these days. Before the financial crisis, they could have opened a new equity line even if their incomes were diminished or non-existent. These days lenders are wary of anyone who’s lost a job, which can make borrowing against a home problematic when you’re facing a financial crisis.

One solution is to open a home equity line of credit and keeping it open and unused for emergencies. Another is to simply make sure your debt payoff strategy makes sense with your larger financial picture. If you’re not saving enough for retirement or emergencies, those should be your priorities long before you target low-rate, tax-deductible debt.

How to deal with your debt

Zemanta Related Posts ThumbnailDebt may be a four-letter word, but it’s not necessarily the enemy. Some debts are much, much worse than others, and knowing which to tackle first can leave you richer.

That’s the central idea of my book “Deal with Your Debt,” and I go into more detail in this interview with Experian’s Mike Delgado. (Also, you’ll get a great view of one of our bedrooms…I couldn’t get my laptop to cooperate with Google Hangout, so I had to resort to the desktop.)

We covered a bunch of topics, including:

  • What you need to know about getting, and paying off, student loans
  • Why retirement has to be your top financial goal (yes, even ahead of paying off debt)
  • What debts to tackle first and
  • When to consider filing for bankruptcy

…and much more.