Let’s Talk about Debt (Including How to Get out of It)

Americans’ debt is growing. Should you be concerned?

We are a nation in debt. According to the Federal Reserve’s most recent report on household debt and credit, total American household debt increased by $87 billion in the third quarter of 2020.

From a macroeconomic perspective, higher debt levels can be positive because they indicate that banks are comfortable lending; they can also lead to increased consumer spending, which drives economic growth.

As an individual, however, you should generally seek to lower your debt, especially as you near retirement, when you may want to live more modestly.

If you are in debt, you may want to look into ways to pay it down. High interest rate debt, such as credit cards, should generally be paid off first. Low interest rate debt, such as mortgages, should generally be paid off last (especially if the interest is tax-deductible, as mortgage interest often is).

Many people struggle to determine if they should pay off debt or save for retirement first. There is no one-size-fits-all answer, but the conventional wisdom is that you should pay off debt first if the interest rate on it is higher than the income you can earn by saving and investing. The “magic number” will vary by individual.

Some people also ask if they have extra money, which should they do first: pay off debt or invest? If the interest rate on your debt is low and you can get a higher rate of return by investing, you may want to consider investing before paying off your debt. You could also use some of the extra money to pay off debt and some to invest.

If you’re concerned about debt, call us or email us for some professional input. The more information you have, the better prepared you can be, and we are always here to help.