Why You Might not Want to Become Debt Free

Written by admin on April 30th, 2011

Is it really smart to become completely debt free? Becoming totally debt free is an amazing achievement that can require a lot of work.

But depending on your financial situation, you might be better off keeping some of those loans and continuing to make payments over time. Take student loans for example. These are some of the cheapest forms of debt, and it can help you to keep them. If you have multiple student loans, consolidating them and negotiating better terms might be the wiser move over paying off the loans in full. Here’s why:

• Up to ,500 in interest paid on your student loans is tax deductible.

• A 10% return from an investment is greater than the 5% interest you are paying on the student loan. Reinvest those earnings back into the investment, and over time compound interest will increase those returns.

• If you invest the money in a tax sheltered retirement account instead of paying off the loan, you could be using pre-tax money. This lowers your realized income, which means you pay less income tax. Not to mention taking advantage of company matching programs if offered by your employer’s 401k plan.

• Student loans are the lowest forms of debt. Focus on paying off all other loans first before even considering paying down your student loans.

The same holds true with many mortgages. Wouldn’t it be great to have no housing expenses? Owning your home free and clear could really boost your savings and personal cash-flow. But, you could also invest that money to help you make money.

If you have no other debts and are in the position to pay down a big chunk of your loan, you are really in a win-win situation. There’s no wrong move, there just could be a better one. You could choose to invest that money to help with your retirement savings, or you could give yourself peace of mind by paying your debts in full. Either way, you are in a great position..

If you are in a position to pay off your remaining low-interest loans in order to become debt-free, remember to consider the tax incentives for continuing to pay interest on your loans over time. Is being completely debt free more satisfying to you than investing the money you have to pay off the loan in order to accumulate more wealth?

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