The sage wisdom of our elders is a precious resource that should not be discounted. However, that doesn’t mean our predecessors were always right. In some cases, advice that’s been passed down through the ages is misinformation. Certain anecdotes and seemingly expert financial analysis from bygone days doesn’t necessarily work in modern society.
Debt is a category where we often see this. Old school thinking is that all debt is bad. That’s not true. For instance, eliminating high-interest credit card debt with a debt consolidation loan is a positive step. Borrowing to finance a new business is also. The former decreases the amount of interest you’ll pay. The latter can increase your income. There’s nothing bad about either of those.
Here is more outdated debt advice:
Outdated Tip #1: Never Invest While You’re in Debt
Coming out of Covid, interest rates are historically low, so certain debt is not accruing at the same rate as it may have in the past. Maintaining minimum payments on low-interest debt while investing in equities or ETFs may be more profitable than paying off all debt before investing. This is a different strategy than what has been historically recommended.
There are cases where the old advice is good advice. If you’re carrying large amounts of high-interest credit debt, prioritize that over investing. The average credit card interest rate in 2021 is 15.9%. The Dow Jones year-to-date return is 15.6%. That’s a small difference, but you’ll still be spending more than you’re earning if you don’t pay off your credit card debt first.
Outdated Tip #2: Prioritize Paying Off Your Mortgage
According to Time.com, the average 30-year fixed mortgage rate for 2021 is 2.87%. You could spend your extra money paying that off or you could invest in the stock market and let your money earn more money. This year’s returns are higher than normal, but, on average, equities have produced a 10% rate of return for the past 100 years.
Interest rates are expected to rise next year, but it’s unlikely this formula will change, so we’re going to put this outdated tip under the “all-time” bad advice category. Mortgage payments are not bad debt. Each time you make a payment you’re building equity in your home. Make them on schedule and put any leftover money toward an investment or emergency fund.
Outdated Tip #3: Keep a Small Balance on Your Credit Cards
This is a piece of bad advice that no one seems to take credit for, yet everyone likes to pass along. Contrary to popular belief, there is no benefit to keeping a balance on your credit cards when you can afford to pay them off. If you’re worried about losing them due to inactivity, use them occasionally, then pay off the full balance every month to avoid interest charges.
To sum it all up, pay high-interest credit card debt first, invest in a high-yielding stock market when you are able, and make your mortgage payments on time. Refinance the mortgage if you’re not getting the low interest rates available right now. That’s the best advice we can give you for today’s economic climate. It’s subject to change in the future.