Financial Planning: Debt Management

Financial Planning: Debt Management

Kyle Swaim
TB Group LLC


If you have an extra dollar, should you use it to pay off debt or to increase your investments? The net effect is the same, so your accountant may not care which approach you take. But your financial planner cares a great deal. Let me make the case for retiring debt before you try to increase assets.


The Return on Your Investments

Over the past 100 years, the S&P 500 (the most widely used stock index) has averaged a 10.53% annual return. That’s why I believe a well-balanced portfolio is likely to give you 10% per year. The return on your particular investments, of course, might be a little bit higher. It might be a  little bit lower. On average, however, most households probably get an average of 10% on their savings and investments.


But according to Nerdwallet, “The average personal loan interest rate for consumers with good credit (690 to 719 credit score) is currently 14.87%.” In practical terms, that means that paying off a personal loan is likely to yield a return nearly 1.5 times higher than whatever you’re getting on your investments (14.87% compared to 10%).


Where to Find High-Impact Debt Retirement

If you have revolving credit card debt (i.e., a persistent balance), the opportunity is even better. The average rate for new credit card customers is 22.03% for new offers and 21.59% for existing accounts. Let’s round that off to 20%, which means your return for eliminating a credit card balance is twice as high as what you get on your investments (20% compared to 10%). The dollar you use to pay off a credit card balance only increases your net worth by a dollar, but by reducing your subsequent expenses (interest), it builds your wealth twice as fast as investing that same dollar. Sounds like a no-brainer, huh?


The principle doesn’t apply as straightforwardly to secured loans, such as your mortgage or a car loan. Secured loans tend to have better rates than unsecured ones. If your credit score is over 600, you can generally get a loan for a new car at less than 10%, which tends to even up the return between what you can get on your investments and what you can get by retiring the loan. My advice is to work on your unsecured debts first. That’s where you’ll get the most benefit.


Getting Debt Under Control

If you have more debt than you are comfortable with, you are not alone. Total consumer debt in the U.S. stands at just over $17 trillion. The average American is $101,915 in debt. That figure includes credit cards, student loans, personal loans, auto loans, mortgages, home equity lines of credit, and even medical debt.


People in general are so worried about their debts that the U.S. Federal Trade Commission has published a web page called How to Get Out of Debt. If you’re concerned about your debt level, I highly recommend reading that page. It is filled with authoritative information and advice, including how to get started, what to do about collection agencies, and how to avoid debt settlement scams.


Once you have your debt under control, you can start on the next step in the financial planning process: securing insurance and other protections. I’ll be writing about that next time. 


Photo: “Man in Black Suit Holding Banknotes and Credit Card” by Andrea Piacquadio via Pexels


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