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When to Think Twice About Paying Down Your Debt

by Miranda Marquit

We all know that we’re supposed to be paying down our debt — and doing it aggressively. However, there are situations when stretching your finances each month to make that extra payment might not be the best idea. While you want to meet your obligations whenever possible, and get rid of your debt as fast as you can, it’s not always a wise idea to put every penny toward aggressively paying down your debt. Here are some situations that should make you think twice about paying down your debt :

You’re Uncertain About Your Job

While the worst of the economic downturn appears to be over, there are still those in precarious positions at their jobs. If you are uncertain about your job prospects, and fear being laid off in the next few months, putting every extra penny toward reducing your debt might not be the best idea. Instead, you might be better off building up your emergency fund. You can still work toward debt reduction, but you might slow it down so that you can prepare for something unexpected. Otherwise, you might find yourself with no choice but to turn to debt when you do get laid off, running the credit cards back up.

You’re Paying Down the Wrong Debt

In some cases, you might be making great strides with your student loans or your home mortgage while this is a positive thing, you shouldn’t be aggressively paying down these debts until everything else is paid off. Student loans and mortgages generally have low interest rates — and the interest is tax deductible. Before focusing on building more equity in your home, you need to pay down your higher interest debt. This is debt without tax benefits, such as credit cards, payday loans, or other high interest debt.

You’re Stealing from the Future

You do need to get your debt paid off if you can — and do it quickly. But you should also be preparing for the future. You want to keep making some contributions to your retirement fund while paying down debt. And don’t raid your retirement account to pay off the debt. Sure, you can pay back the loan from your account, and you are paying yourself interest. But if you aren’t careful, you could end up paying penalties and taxes on the amount you use to pay down your debts. On top of that, you can’t replace the money the missing principal would have been making.

You’ll Never Pay it Off

Finally, you need to realize that you might be in way too deep to pay off your debt. While it is better to meet your obligations, sometimes you might need a settlement to reduce the amount you owe, or you may even need to file bankruptcy. This might not be your favorite option, but if you are so far in that no matter how aggressively you try to pay it off, you cant, then it is time for drastic measures. Continuing to try to pay down debt that is honestly too big for you will only result in years of frustration as you do everything you can, only to fail. Honestly evaluate your situation.

Usually, paying down your debt aggressively is a good idea. However, there might be some circumstances in which it is better to take things a little slower, and save the final pay off for another day. Once you are in a better position, you can begin stepping up your efforts.


Published or updated February 3, 2011.
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{ 8 comments… read them below or add one }

1 Lonnie @ My Income Lab

Right now my wife and I decided to put debt payments (it’s credit card debt) on hold because she is having a baby at the end of June. Maternity leave is unpaid and our cost of living is so high that we are aggressively building a savings for those few months we won’t have her income.

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2 Ryan

Lonnie, that is a great time to stop accelerated debt payments – it’s always good to have a little cash set aside in an emergency fund for expected and unexpected expenses!

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3 KDB

Your third point is a good one. Ignoring your debt isn’t good, but if you really can’t pay it, look towards debt settlement or bankruptcy if needed. I used settlement and while I hated to do it, it helped tremendously. Part of me still feels guilty, but reducing the stress was well worth it.

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4 Donny Gamble

I’m not worried about paying down my debt right now because I rather invest that money into a business.

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5 krantcents

If you can not pay it off, maybe a lower interest rate could be the answer.

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6 K.C.

I like to see aggressive debt reduction balanced with savings. Developing the savings habit is what keeps a person from taking on new debt. Making regular payments on debt and paying it on time will eventually pay off the debt provided no new debt is created. A healthy savings account is necessary to avoid taking on new debt.

Accelerated debt repayment is about saving interest on the debt. But interest is just the cost of time for the use of the money. As you mentioned, sometimes it makes sense to pay the interest in exchange for a little more time to pay off the debt. Especially, if it avoids the need to take on new debt.

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7 brokeprofessionals

All good points. The issue of how to balance debt/savings is one of the most confounding issues in all of personal finance to me. It is not said often enough that people need to save up money if there job may be in jeopardy now or in the not so distant future. Once you pay off that debt, the monthly payments (in most cases) will stay the same, you will not be able to get it back, and you could have (if things went wrong) deferrred it anyway. (particularly with federal loans). Not that it is something you would want to do, but it is nice to consider all of your options.

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8 Andrea

These are some good tips, but in order for me to be financially free one day I am going to have to pay down my debts the best way possible. Although I will try and set some money away for an emergency fund.

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