I have long advocated the “pay yourself first” principal, in which the first 10 cents of every dollar you make goes into an investment portfolio designed to give you a high quality of life in your retirement years. When this is mentioned, there is the inevitable question: “But what if we owe consumer debt; should we still pay ourselves first, payoff the debt first, or split the difference?”
Consider this metaphor. You find yourself back in grade school, and a bully stops you on the sidewalk each morning and takes your lunch money away. You could decide to do nothing, realizing that one of these years you will be out of school. You could tell your parents that the price of lunch went up, allow the bully to keep taking the usual amount, and hide the rest away in your shoe. Or, you could decide that you have had enough of the bully’s behavior, and that you want to take your self respect back. Besides, you are tired of going through the day hungry. You focus all efforts on stopping the bully, by whatever means necessary. Now that you can see the forest from the trees (those bullies really seemed bigger than life when you were smaller), you know the right answer.
Granted, we weren’t minding our own business when the big ole’ banks came along and demanded our lunch money. But, if you have consumer debt, you should consider them bullies nonetheless. Think about it. Banks pay you well under 1% per year to keep your money safe and sound in an account, but they turn around and charge you double-digit interest rates on your credit card balances. They know you will most likely make the minimum payments, and they count on that to make their profits. The last thing they want is for you to plop down a pile of cash and proclaim your freedom.
There is your answer. As an investment professional, I realize the return you could make on a successful investment. But, the higher the potential return, the more risk you take. I had clients in “safe” AA-rated Lehman Brothers bonds when the government decided to let them go bankrupt. How does a return of 20 cents on the dollar sound? I guarantee you, however, that the banks will continue to charge you interest on your credit card debt at a level astronomically higher than what they are charged to borrow money from the federal government or another bank. They wouldn’t put up with this extortion, so why should you. Every dollar you pay down your debt is a dollar you are paying yourself. And every time you pull out that credit card, knowing that your balance won’t be paid off within 30 days, you are creating a bully that will pester you each and every day. Pay off your consumer debt first, and vow to never let it get out of hand again.
Copyright 2013, Penn Wealth Publishing. All rights reserved.