Tuesday, February 20, 2007

What about debt?

The overwhelming response to my blogs about investment and retirement planning is “How can I even think about investing and planning for retirement when I am in debt up to my ears?” This highlights one of the major hurdles most people have on their way to financial security, so let’s explore the issue a bit further.

Debt can be both addicting and suffocating. At first, it seems harmless enough… I want something and by incurring a bit of debt I can have it sooner. But, if I didn’t have enough cash to buy what I want today, the cost of the debt means I’ll have even less chance of having what I want tomorrow, unless I increase my debt again. This can easily become a vicious cycle, similar to an addiction. And in the end, it suffocates you financially.

Don’t get me wrong. I love debt. I charge virtually everything to my credit cards. I get significant rebates from the issuers and I get to keep my money invested longer. I just make sure my spending is such that I can pay it when the bill comes at the end of the month. Voila, interest free money and rebates to boot.

But the issurers know that most people will charge more than they can afford and will then be forced to pay their astronomical interest rates, drawing them further into the web. Don’t allow it to happen. If you can’t keep your spending to what you can pay off each month, cut the credit cards up and pay them off pronto. I know that is tough, but like drug addiction, the best way is to quit cold turkey. Resolve to buy absolutely nothing but necessities until the debt is gone, and don’t fall off the wagon again. You can do it if you make that commitment. Otherwise you’ll be permanently in pain and will find it difficult to meet your financial goals.

As I mentioned, the cost of consumer and credit card debt is high. This begs the question…Should I stop contributing to my retirement accounts until I’ve paid off the consumer debt?

While I know there is room for argument, my answer is that you should continue to fund your retirement while you pay off the debt. You are likely in debt because of a lack of discipline and funding a retirement account on a regular basis is a good way to establish that discipline. Automatic contributions establish the discipline needed and the tax deferred or tax-free nature of the vehicle makes it profitable. If your employer matches your contributions, so much the better. You need to establish that you can live below your means after meeting your long term obligations. Take the challenge, you’ll be surprised at how little you can really live on, and you’ll gain some confidence that will serve you well.

1 comment:

Hitotsu Ningen said...

In the past I've been foolish with my use of debt and I've paid the price. I've also heard some financial planners talk about "good debt" and "bad debt". What is the difference in the two and what is the Guru's take on the idea?