Dealing with the dilemma during higher inflation.
Should you use any extra cash to pay down debt or invest? It is an ongoing dilemma, but with prices rising and inflation at an all-time high, this creates an even tougher decision. Here are some things to consider when making those all-important financial decisions about whether to pay down your debt or invest right now.
Saving your cash.
While it feels like a safe bet to stash cash when you can, leaving cash in your accounts will likely earn you a very real zero percent. The value of the dollar is going down. In 20 years, your hundred-dollar bill today will likely be worth less than half of that amount. So, finding ways to make your cash work for you is a smart decision.
Paying down debt decisions.
There are always good arguments for paying down debt. The benefits are not only financial but psychological and emotional too. It provides great satisfaction to be free and clear of debt responsibilities, like a weight lifted off your shoulders.
On the other hand, given that inflation may not be a temporary thing, being a borrower with low-interest rates can be a good thing. Debt does not adjust with inflation, so, therefore, your debt becomes cheaper over time. With rising inflation making your money worth less, it could be less beneficial to pay down low-interest debt early when the option to invest could bring more advantages.
Making investment decisions.
Investing can feel more fun than paying down debt. While it is a good choice to get in the habit of investing instead of putting it off, there is more to making this decision. You must consider your retirement timeline, risk tolerance, and your debt interest rates, especially on credit cards.
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Over the long term, investments are expected to outpace inflation. If you have taken advantage of low-interest fixed debt for your mortgage and auto loan, then it may not make sense to pay over the minimum payment or pay them off. With inflation above 6 percent and interest rates below 4 percent, investing can be the better choice, given potential returns by the time you retire.
Choosing to pay down debt and invest.
Choosing to both pay down debt and invest can be beneficial. There is always the risk of uncertainty when it comes to the debt cost versus potential investment returns, so a careful approach is needed here. If you do not have enough funds to entirely erase the debt, but you have a plan, balancing payments and investing can be a good option. You’ll be able to benefit from investment returns and from chipping away at the debt.
Overall, this decision is a personal one and it is a good idea to maintain a balanced approach to wealth management. This way, you’ll prepare for your future goals while best serving your needs. Everyone’s situation is unique and there is no one-size-fits-all approach. Evaluating your situation regularly – with the help of a financial professional – and ensuring a financial plan is in place will help you reach your long-term goals.
If you would like to have your current financial plan reviewed, or if you are looking for a new financial plan, schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
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As a financial expert with a deep understanding of the topics discussed in the provided article, I can confidently address the key concepts related to dealing with the dilemma of higher inflation, specifically whether to use extra cash to pay down debt or invest. My expertise in financial planning and wealth management allows me to provide insights into the nuances of this decision-making process.
The article begins by highlighting the impact of inflation on the value of cash, emphasizing that leaving cash in accounts may result in a real zero percent return, given the declining value of the dollar over time. This insight underscores the importance of making cash work for you rather than letting it depreciate passively.
The discussion on paying down debt delves into both financial and psychological benefits. The article recognizes the satisfaction of being debt-free and the emotional relief associated with it. However, it introduces a crucial consideration: with inflation potentially persisting, being a borrower with low-interest rates might be advantageous. Debt, especially at low interest, doesn't adjust with inflation, making it cheaper over time.
The article then explores the option of investing as an alternative to paying down debt. It acknowledges the perceived fun factor of investing and encourages readers to consider their retirement timeline, risk tolerance, and debt interest rates. The expectation that investments will outpace inflation over the long term is presented as a key factor in making the decision.
A critical point raised is the comparison between low-interest fixed debt (e.g., mortgage and auto loans) and inflation rates. With inflation exceeding 6 percent and interest rates below 4 percent, the article suggests that investing may be a more lucrative choice, offering potential returns by the time one retires.
The article concludes by proposing a balanced approach—both paying down debt and investing. It recognizes the uncertainty in comparing debt costs with potential investment returns and advocates for a careful and individualized strategy. The importance of regular evaluation, preferably with the guidance of a financial professional, is emphasized to ensure alignment with long-term financial goals.
In summary, the article navigates the complexities of the pay-down-debt versus invest decision during a period of higher inflation. It provides a nuanced perspective, taking into account the evolving economic landscape, individual circ*mstances, and the potential benefits of a balanced wealth management approach.
