When Paying Off Debt is not a Good Idea
When Paying Off Debt is not a Good Idea
Several people in the community are engaged into loads of debts resulting to foreclosures, huge credit balances and bankruptcies. This is due to the erroneous manner of paying off the debts thus making them more financially burdened, but there are some points to know when it's not a good idea to pay off the loans.
You are paying for the wrong debt
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Some people are thinking of increasing their investments by sending more payments on their current mortgages. Others are paying their loans earlier by choosing a 15-year loan instead of a longer term of 30 year loan. But in their anticipation to accelerate to free themselves from loans, they seem to mislook other debts that will cause them to pay more.
If you plan to pay off your balance, make it a point to give priority to your highest-rate nondeductible debt like credits cards, car loans and personal loans to get paid, only then that you consider pre-paying your business and students loans. Mortgage interests are not recommended to be paid immediately, don't rush in paying them.
You are losing sight of your retirement savings
Young generation doesn't seem to understand the importance of saving for retirement. They use whatever savings they have in paying their debts not knowing that they are losing their opportunity in getting back to contribute for a tax-advantage retirement plan. After your debt is paid off, you may be able to make up for the lost opportunity in making extra contributions to your retirement plan, but you can no longer take back the free money that you missed or the time that your money could have grown to a substantial amount in 30 years. You may have saved yourself from debt by suspending your retirement contributions but you should understand what would have cost you on your decisions.
Using your retirement savings
For some people, withdrawing the retirement fund is a bad idea, but makes an argument to better borrow from their own savings through the 401K loan to pay off debts. Most of these people have no idea that they are losing a lot of money to taxes and penalties. Once the retirement fund is withdrawn, there is no possibility to put it back, hence you lost all the future tax-deferred compounded. There are risks associated in borrowing from your 401k wherein you have to payback your loan in a short time when you lose your job or your credit card may result to bankruptcy.
If it's hopeless
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Many people feels satisfied once they have successfully paid enormous debts in such a short time, but on the other hand, there are still many people who are struggling with so many bills they can impossibly pay with no hope for financial recovery. So many reasons are behind this situation and one is their financial stupidity on getting credits they can hardly handle. Some people may even withdraw all the retirement funds and use their home equity in paying enormous bills, loans and credit card debts.
It could be tough though, if somebody is having a desperate situation, because there are credit counselors who will convince you to pay off your debts and there are bankruptcy attorneys to help you file for a bankruptcy protection. Bankruptcy is not a solution, but sometimes considered as the best of bad options. Talk to either of the two before giving your final decision.
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