Pay Off Debt or Invest For the Future?

Pay Off Debt or Invest For the Future?

Often people ask me whether they should pay off all debts before saving for the future or save first in hopes of earning a higher return on investments than they are paying in interest on debts. This is an age-old debate, and I have heard convincing arguments from Financial Advisors on both sides. The “Pay Off Debt” Argument Some advisors recommend that we liquidate all of our savings and investments except a very small amount, even as low as $1,000, to immediately pay down as much debt as possible. Then they recommend that we use every discretionary penny from each paycheck to eliminate the remaining debts as quickly as possible. After we are completely debt-free, then we can start saving and investing for the future. I admire people who are disciplined enough to follow this extremely aggressive strategy, but it is risky because it does not leave an adequate safety cushion. A $1,000 savings account would not be enough to cover unemployment, major unexpected expenses, or serious extended illness. What would happen to my house if I could not make my mortgage payment for six months due to unemployment? Would the bank cut me any slack because I had been paying them extra for the past year in hopes of paying my mortgage off sooner? Not likely. We should always maintain at least three to six months of living expenses in liquid savings, even if we have debt. The “Invest it All” Argument On the other extreme, some people recommend borrowing as much as the banks will allow and investing it all because they declare we can make more...
What Is the Biggest Threat to Financial Security?

What Is the Biggest Threat to Financial Security?

One especially curious phenomenon deeply impacts the financial decisions we make. We are all affected by it. No one is immune to it, including myself. It is commonly known as “keeping up with the Joneses.” The Danger of Comparison We enter dangerous ground when we care more about what others think of us than we care about doing what is right for ourselves and our families. This is a slippery slope that can ruin us financially because we can never be completely satisfied that we are impressing everyone around us. We will always be able to find someone who has more and better things than we do. The sad news is that even if we spend every last penny to impress others, most of the people we are trying to impress may never even notice. Most people do not care about our image as much as we think they do. Think about it. How much time do you spend thinking about how idiotic someone is because they drive a junky old car or how awesome another person is because they live in a mansion? If you notice at all, I suspect you may give it a fleeting thought for a few seconds, and then you move on to focus on what you are trying to accomplish. No one is really paying much attention to our possessions. They are all too busy worrying about themselves. If we do have friends who make fun of us for not buying all the expensive toys they have, maybe we shouldn’t hang out with them so much. Many reckless spenders poke at frugal people...
More Money, More Stuff? Don’t Count on More Happiness

More Money, More Stuff? Don’t Count on More Happiness

By Carl Richards What is the one thing that, if you could just get your hands on it, would make you much happier? Go ahead. Get out a piece of paper and write down the first thing that pops into your head. Got it? O.K., now fess up. Who wrote something about a new car? How about a promotion? A bigger house? A raise? A yacht? But if you wrote down almost anything at all (except a wish for deeper and more long-lasting relationships), you’re probably wrong. It turns out that happiness doesn’t come from more money, more stuff or even big life events like getting a raise or landing that dream job. A study from the 1970s by Philip Brickman, Dan Coates and Ronnie Janoff-Bulman for the Journal of Personality and Social Psychology even found that lottery winners took less satisfaction than nonlottery winners in everyday events, and in general, they were not any happier than those who didn’t win the lottery. If winning the lottery doesn’t bring happiness, how likely is it that a new boat will? Not long after my wife and I married, we were walking around in a Salt Lake City park, superexcited to be newlyweds and with big dreams about the future. We started talking about money. While I can’t recall the exact number, I do remember saying something like, “If I can just make X dollars, we’ll be so much happier.” It seems so shallow to think that some thing or number will make me happier. But then I realize how often I have heard others say it, too. Even more common...