If you’re in significant debt, it can limit your financial flexibility. However, you’ll find plenty of so-called financial advisors who say focusing on paying down debt is the wrong move. They claim that doing so will preclude your ability to save and invest for the future. While that may be true in the short term, there are plenty of good reasons you shouldn’t delay paying down your debt. Here are six of the most compelling among them.
1. Interest Will Overtake Investment Gains
In almost all cases, the interest on your debt will equal more than you can gain monthly through investments. The average credit card has an interest rate between 19.99% and 25.99%. There aren’t any investments that will reliably exceed that. You likely won’t even find investments that will exceed the interest you pay on consumer loans.
2. Ignoring Debts Creates Liability
If you don’t add money to your savings or investment accounts, the worst that will happen is you’ll feel a little disappointed. You could end up in collections if you don’t pay your debts. Then, all of your assets could be at risk—including your savings and investments. That can leave you even worse off than where you started.
3. Paying Debts Improves Your Credit Score
Lowering your overall debt load will lead to incremental improvements to your credit score. Saving and investing can’t do that. With a better credit score, you may even be able to consolidate your debt and lower the interest you’re paying on it.
4. It’ll Reduce Your Stress Level
If you’re like most people, you probably spend plenty of time worrying about your debts. Prioritizing paying them down gives you a sense of agency and helps relieve that stress. It also lets you chart a course that leads to longer-term financial health.
5. It Creates a Snowball Effect
Paying off your debts, even slowly, creates a snowball effect that speeds up your debt reduction. As your balances fall, making the same monthly payments will have a larger impact. That can turn what seems like a never-ending cycle into a manageable process. It’s the opposite of what happens when you allow interest to increase your debts every month. Using that effect to your advantage is undoubtedly better than the alternative.
6. You Can Avoid More Drastic Debt Relief Measures
If you let your debt get totally out of control, you may need to take drastic measures to deal with it. At a minimum, you might need to resort to a consumer proposal to halt collections and reduce your debts. If you wait too long, you could be forced into bankruptcy, which will have an even larger impact on your finances.
Prioritize Reducing Debt
No matter what anyone tells you, prioritizing debt reduction is always a smart idea. There are too many consequences involved in ignoring your debts. Plus, no alternative strategies will leave you in a better position. And the sooner you finish paying off your debt, the sooner you can move on to more lucrative and rewarding financial efforts.
