Which Debt Is Actually Good to Hold Onto?
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Here's your Money Briefing for Tuesday, January 3rd. I'm J.R. Whalen for The Wall Street Journal. All last week, we spoke with personal finance experts about how getting out of debt can allow you to have more flexibility and achieve important financial milestones in your life. But there are actually times when paying off your debt might not be in your best financial interest.
If you're in solid financial shape and you're young or you're getting into your retirement years, you may be able to earn more by investing the amount it would take to pay off the loan in a higher yielding account.
But which debt should you pay off and which might you want to hold on to? WSJ and Barron's contributor Cheryl Winokur-Munk will be here to talk about that after the break.
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For some people, debt is, well, literally a four-letter word. While too much of it can weigh down your finances and make it harder to, say, get a car loan or a mortgage, some debt may actually be worth holding on to.
What is the episode about and who are the hosts and guest?
WSJ and Barron's contributor Cheryl Winokur-Munk has been speaking with financial professionals about good and bad debt, and she joins me now. Hey, Cheryl, thanks for being with us. Thanks for having me. So Cheryl, you know, why is I got to pay down my debt often the prevailing feeling when someone is managing their personal finances?
It's just something that's been drilled into people for so many years by parents, friends, relatives, sometimes even trusted advisors. So holding debt can have an emotional toll as well. And there's something just psychologically freeing about being able to say you're debt free.
Alright, so let's talk about different kinds of debt that someone might have. What types of debt should somebody consider not rushing to pay down?
Fixed low interest rate loans, especially if you've got predictable and reliable cash flow. So these include things like a fixed rate mortgage, a home equity line of credit, and credit lines on securities accounts. And those credit lines on securities accounts allow people to borrow funds using assets in their investment portfolio as collateral. They don't have to liquidate the securities, and that's a bonus for people who want this type of flexibility.
Now, we're in a high inflation, high interest rate environment. How does that change the way people should think about holding on to their debt?
So I want to distinguish here between good and bad debt. With good debt, like a fixed mortgage loan, inflation can be a good thing because your monthly payment is going to be the same while your house theoretically increases in value. When we're talking about good and bad debt, I would put credit card debt in the category of bad debt. So they're usually variable rate interest rates and they can be very high, 20s, 30s in some cases. And so that's the kind of debt, especially in a rising rate environment, you're not going to want to hold on to. And because people hold on to all kinds of debt, it's really best to talk to a financial advisor when you're considering what to pay off and when and what to hold on to.
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