In my 30s, I saved as much as I could for retirement instead of paying down my debt. I believed the myth of having “good debt” versus “bad debt.” My mortgage was supposed to be good because I paid a low interest rate. Theoretically, I could make more money by investing in stocks if they offered a higher return. However, just about the time the housing market crashed, I experienced a 401(k) meltdown. According to a recent article by The Motley Fool, it’s better to finance a home with the low interest rate environment. The author suggests a person can reasonably expect a 7 to 8-percent return on investments, which makes it advantageous to borrow money at around 4 to 5 percent. In my experience, this line of thinking rarely turns out to be true.
Planning for job layoffs
When my colleagues in their 50s unexpectedly lost their jobs, they also lost their homes. It’s not impossible to borrow money from a retirement savings account, but it can be costly. Most people I know let their homes go into foreclosure or arrange a short sale. By paying my mortgage off before I turn 50, I reduce the risk of losing my home due to a job layoff.
Getting a reliable rate or return
When I pay down my mortgage with a 2.75 percent interest rate, I know I’m definitely getting a 2.75 percent return on my money. But, I’m also getting something else in return. Without a mortgage in retirement, I won’t have as many expenses. I won’t have to withdrawal as much money from my retirement accounts, which means I’ll owe less in income taxes. Also, I’m extremely skeptical that I’d really make a 7 to 8-percent return on my money by investing in anything. No one can guarantee me those kinds of returns.
Paying for a useless degree
People often say student loan debt is “good debt.” I found out that my bachelor’s degree in English was a waste of money since no employer ever even asked for a copy of my diploma or transcript. I worked in public relations, print media and the publishing field for two decades with a number of people who never graduated from college. I spent almost a decade working 7 days a week so I could pay off my student loan debt for a degree. I think colleges and universities should offer free liberal arts degrees for people who want to explore philosophy, history, art, religion or psychology. The only degrees people should have to pay for are degrees that lead to specific careers or require specialized training.
I don’t think having a degree increases a person’s earning power as much as having talent and marketable skills increases the chance of landing a lucrative career. I rather have a good credit score versus a college transcript will all A’s. I couldn’t afford to buy a home without a mortgage. However, my good debt would turn bad very quickly if I still had a mortgage in my 50s or beyond. Ultimately, any debt is bad when it makes me feel bad.
More from this contributor:
I Paid Off Debt at Zero Interest First
Escaping a Lifetime of Debt
My Life After Debt