To Be or Not to Be – in Debt
Weigh these factors first when considering when to borrow.
Life’s long and winding road generally includes plenty of side trips on the way to a comfortable retirement. There may be homes to buy, children to raise and educate, careers to pursue, a vacation here and there.
When done strategically, borrowing can help you address those needs – like purchasing a home – without derailing long-term goals, such as a comfortable retirement. The key is to consider how the loan will work within your overall financial picture, taking into account each factor including the interest, duration and regular payments.
For example, while you may be itching to pay off a low-interest loan you have on your home, doing so could mean using investments that are likely to appreciate over time, if left untouched. Given that returns on investments may be higher than the interest on a loan, keeping your assets invested may give you a bigger head start on a comfortable retirement down the road. Conversely, high-interest debt such as credit card debt should be paid off as soon as possible.
As you make your decisions, think about:
- How much debt you’re willing to take on
- Whether you prefer to sell assets or borrow
- The anticipated rate of return on your investments
- The anticipated cost of borrowing
- If it makes sense to borrow in the name of a trust or business
- What loan structure makes the most sense: traditional, adjustable-rate or collateral-based loan, among others
- Whether you prefer to use securities, your home or some other asset as collateral
- Tapping into the equity in your house, especially if rates are attractive
- The tax ramifications of a loan compared to selling investments
- How quickly you need the money
- How long you’ll need the loan, particularly a mortgage
- How you’ll pay off a loan and when
Call on your financial advisor for guidance as you weigh your options and to help you to map out a plan to strategically manage your debt while pursuing your long-term goals.