The Boulevard to Financial Independence

By Randy

Marriette, you have good instincts. While saving for retirement should always be a priority, one of the most effective ways to “earn” a good return on your money is to pay down your debt. When you consider that the long run returns of the stock market are somewhere in the vicinity of 10-11% per year pre-tax, a realistic after tax return expectation is closer to 8%. If you are paying interest on debt, other than the mortgage on your house, at a rate above 8% you actually will get a better “return” paying off the loan as opposed to investing the money in stocks. It’s easy to think of your student loans or credit card debt as just a payment, but a good part of that payment is interest. If you can’t earn more on your investments after tax than you are paying in interest on your loan then your priority should be to pay off the loan.

There is an exception though (isn’t there always) when it comes to most people’s 401k savings. If your employer offers a match for a portion of your savings then that’s a gift to you that you do not want to miss. Think of it this way, if your employer matches your 401k contribution up to $5,000 then your $5,000 savings just got a 100% return! I sincerely hope that a 100% return beats the interest rate on even your worst loan.

So good work Marriette and keep whittling away at your debt. The beauty of that is as you begin to eliminate debt you’ll have fewer payments and more free savings to make the rest of the debt go away even faster. It may not feel like you’re making progress at first but you’ll be surprised how quickly you’ll get ahead if you just keep it up.

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