First, make a list of everything you owe, including your debts with the balance, interest rates, and minimum monthly payments. Include everything: credit cards, student loans, auto loans, mortgages, and anything else with an interest rate.
Now take a look at interest rates. If your expected rate of return on investments is lower than the interest rate on your debt, a good rule of thumb is to pay down the debt first.
While the stock market has typically returned about 9% and 10% annually, bonds typically have a lower rate of return, averaging between 5% and 7%. If your debt has interest rates higher than 10%, it’s likely best to pay this down first. If you have loans with a lower interest rate (think 3% home or auto loans), it’s better to invest your money because you can expect to earn more on investments long-term.
If your debt interest rates are between 5% and 10%, the decision is harder. Some loans can be restructured, which can offer a lot of flexibility.
If you decide to pay down debt, here are a few ways to make it manageable:
• Stop using credit cards.
• Prioritize a balance to pay down first.
• Know your due dates and avoid late fees.
• Consider consolidation to combine high-interest balances into a single lower-interest loan.
Debt isn’t always bad. It can offer flexibility and allow investments to grow while letting you meet other goals. Review your situation and decide which approach will maximize your chances of reaching your financial objectives.
Consulting a financial advisor before deciding between paying off debt and investing is also a good option. If you take your time and weigh all your options, you have the ability to make your money work harder for you — and that’s always a good thing.
Contact Robin Wandschneider, Retail Group & Small Business Banking Manager at Robin.Wandschneider@CommerceBank.com, or call Commerce Bank’s Centennial branch at 303-214-5493 for your banking needs.