The term “debt” often has a negative connotation. Many business owners or farmers I meet with aim to be completely debt-free, or couples looking to retire soon, want to have their home mortgage paid off prior to retirement. Why? Should we be debt-free?
There can certainly be a “peace of mind” factor that comes with having no debt. And for some people, having no debt might be the best strategy. But many successful, well-known Fortune 500 companies, for instance, have debt. Smart investors, financiers, and wealthy individuals also maintain some level of debt in many cases.
When deciding to take on new debt, or to keep the debt that you have, it comes down to three questions:
1) At what interest rate is the debt?
2) Is the interest rate fixed, or is it adjustable? It will likely increase or decrease over time.
3) With the cash you have on hand, what interest rate are you able to earn on it?
It’s easy to understand low interest rate debt is preferable. Shop around to find the lowest interest rate available to you when deciding to take on new debt, or perhaps in a refinancing situation. The Federal Reserve has been raising interest rates, and is likely to continue raising interest rates here in the U.S. It would therefore be advisable to get a fixed rate loan (or to make sure the debt you currently have is at a fixed rate) versus an adjustable rate loan where the interest rate is probably going to be higher in the future. This would cause your payment to increase over time.
Regarding the cash you have, can you invest it (or save it) somewhere and earn a higher rate than you’re being charged on your debt? If you can, perhaps keep your cash and allow it to earn the higher rate, and utilize debt at a lower rate. If the opposite is true—your debt is costing you more than your money is earning—you might consider using your cash to pay down the high rate debt.
This column is sponsored by Allen & Company, and the opinions expressed herein may not reflect those of CFAN or of its advertisers.
BIO: Born and raised in the Central Florida area, Eric Greenhow strives for excellence — embodying the spirit and core values of Allen & Company. He is nationally recognized for his industry leadership and community service and is a Chartered Financial Analyst® and CFP®. For more information about Eric and the Allen Investments Team, call 863.294.7411 or visit AllenInvestments.com/GoGreenhow.