Personal Finance » Debt

Be careful about how much debt you take on

One of the ways to ensure a prosperous retirement is to work toward paying off your debt before you reach that milestone. Debt drains away your wealth, leaving you with obligations that demand your attention. Retirement is not the time that you want these types of demands on your finances.

Before you take on debt, think about how much of an obligation you are taking on, and consider its impact on your future. Even if you think that you will be able to pay off your debt before retirement, it’s still wise to think twice about how much you borrow.

More debt = more interest paid

Anytime you borrow, you are required to pay for the privilege. You are charged interest, and that money goes straight into someone else’s pocket. The borrow you borrow, the more you pay in interest. Even debt that’s considered “good” — like Heritage fixed-rate home loans or student loans — can end up costing you a great deal.

The debt that you have, and the interest that you pay, can affect how much you have to set aside for the future. Every dollar that you pay in interest is one more dollar that you can’t put to work for you in a tax-advantaged investment account. Over time, that can add up to a lot of money lost to opportunity cost. You aren’t just losing the money; you’re also losing the return that money could have earned.

Be modest in your borrowing

It’s true that there are a number of purchases that are difficult to make without borrowing. Buying a home, completing a college education, and starting a business are all activities that might require more capital than you have readily available to you. In these cases, it might make sense to borrow.

However, when you borrow, it is vital that you borrow as wisely as possible. Just because you might be approved for a big mortgage doesn’t mean that you should get one. In many cases, a more modest home is adequate — and you don’t have to borrow as much when you get a smaller house. You don’t need to go to the most expensive school, and few people need the nicest of luxury cars.

If you do end up borrowing to fund your activities, carefully consider your options. Borrow as little as possible, and then repay the loan as quickly as you can. Don’t take five years to pay off a car loan when you can do it in three years. It can be tempting to use debt — and the fact that some debt is considered necessary and good — as an excuse to get more than you need (and possibly more than you even want). Approval is not the same as affordability. Be realistic about what you can afford, and recognize the long-term impact that carrying debt can have on your finances and your future.

Paying off any debt you have quickly means that you pay less in interest overall. You discharge your obligation, and you can use the money that you were paying to build wealth for the future.

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