I tend to be a logical and analytical person so I’ve always found it difficult to make paying off low-interest debt a priority when the math tells me that the smarter play is to invest it. In the FI community, this is a perfectly valid approach.
However, despite my grasp of the numbers, I have discovered I have a huge blind spot when it comes to my actual behavior. Regardless of what I know, what I’ve done is the exact reason I needed to start this blog. Counter to my expectations, I wasn’t saving more, I was spending more.
Using the Math as an Excuse
Math doesn’t lie, but misunderstanding it can get you into trouble. Let’s play out a scenario that pretty much sums up my history with credit card debt.
First, assume I have $10,000 sitting on a 0% APR credit card somewhere. I can budget enough to pay $500 a month toward paying it off. But it’s at 0%! Why would you rush to pay off a free loan? Mathematically, I’d be better paying the minimum of around $200 and investing the extra $300 where it could earn way more interest.
Awesome! So what do I do? I pay the minimum.
But wait. I feel like I’m missing something. Wasn’t I supposed to do something else?
Yes. Yes, I was.
I was supposed to invest the excess. But I didn’t. I missed the second step. Said as I shake my head ruefully
The math didn’t lie, my behavior changed the variables.
While I know the numbers can work in my favor, it requires that added action to actually invest the difference.
Which I’ve never done.
There’s always been a constant struggle in my mind with going all-in to eliminate our debt and just be rid of it or to optimize and embrace the free 0% interest loan.
While I used to justify maintaining the debt because my money was put to better use elsewhere, I’ve come to realize I’ve been deluding myself. The money has not actually been going where I thought it would be but instead, it’s been used to inflate our lifestyle.
The Lifestyle Creep Trap
Like so many others who have gotten themselves into debt, I’ve allowed lifestyle creep to take over our budget and nullify any mathematical advantage I thought I had. Yes, my debt has been sitting at 0% interest for years, but I haven’t optimized or prioritized savings.
I haven’t entirely neglected savings and retirement, but I haven’t been deliberate in investing whatever has been “saved” by paying less toward the debt.
The mathematical advantage of maintaining my debt hasn’t worked out the way I justified. As such, the only thing I have really “earned” is more time to pay off the debt. But I’m not sure that’s been worth the opportunity cost of less cash flow since I haven’t been investing like I should have.
Choosing To Tackle Debt
There are pros and cons for maintaining the debt vs paying it off, but hanging onto debt is far riskier (what happens if the 0% offers go away?) and also requires more disciplined action to be successful.
I’m pretty risk averse and I obviously lack the discipline, so I’ve decided to change my debt payoff strategy.
From here on out, my goal will be to eliminate all our debt first and foremost. I still want to contribute to Little GFB’s college fund, but outside of that (and Mr. GFB’s 401k contributions), I’m stopping all investments. Everything I can free up will get budgeted to the credit card payment.
We’re also (finally) in the process of selling our house so fingers crossed we eliminate not only that debt, but the massive monthly expense as well. That will free up even more funds to throw at our debt.
Not being prepared for the inevitable is what made our debt balloon in the first place, so I don’t want to be completely complacent and neglect our sinking funds. While I do want to recognize savings wherever I can and put that money toward debt repayment, I want to make sure we’ve got a bit of a buffer in at least the medical, auto and vet categories. I’m hopeful once the house sells I can get those fully funded within a couple months.
If something falls through with the house, I’ll have to put all debt repayment on hold until we find some source of income to cover the mortgage. That would probably be our worst case scenario (barring any catastrophic events).
Also, things could get ugly if I can’t find 0% balance transfer offers until I manage to pay the whole debt off. I’m relatively certain this won’t be an issue, but it’s something to at least keep an eye out for.
I’m sure I’m not being creative enough in brainstorming potential pitfalls, but I’m feeling prepared enough and pretty positive overall about making the change. It may not be the smartest choice mathematically, but it’s a close second (paying off the debt will free up cash flow that hopefully I’ll remember to invest this time) and it should be a massive help for my stress level.
So what’s your take on low-interest debt? Do you carry any and have the discipline to work the numbers game, or are you debt averse and do anything to get rid of it?