When Paying Down Debt Shouldn’t Be Your Priority

African American woman paying bills with digital tablet

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For three years, Erik Tozier attacked his debt. He paid off his student loans and an auto loan, and aggressively paid down his mortgage. After three years of this, he managed to wipe out $45,000 of debt.

Most would have considered this a triumph of financial responsibility. But Dozier has now started to re-evaluate his strategy. He wants to grow his wealth significantly at a young age, and he’s no longer convinced that paying down debt is the best way to go about that.

“Paying off debt will increase my wealth slowly, and really, if I don't have assets, then I'm just getting back to zero, instead of playing offense and growing at the same time,” says Tozier, a statistician based in Minneapolis.

So he pivoted. He’s stopped aggressively paying off his mortgage, and he even took on new debt, financing some home improvement projects at 0 percent and getting a Home Equity Line of Credit to invest in both his business and taxable accounts. Tozier’s energy-efficiency focused home improvement upgrades have dropped his electric and heating bills by 50 percent while increasing the home’s value; he hopes to sell the house and come out of it debt free. He’s also been able to steadily grow his side hustle business to diversify his income streams.

You probably aren’t going to regret paying off your debt. But as Dozier demonstrates, it doesn’t have to be something you pursue so dogmatically that it means pressing pause on all your other financial priorities. In fact, there are times when paying down debt shouldn’t even be your number one priority.

Evaluating Interest Rates

You’ve likely heard there is a difference between good debt and bad debt. Good debt is usually qualified as an investment (e.g. a mortgage or student loans—after all, the later was an investment in yourself). While bad debt is linked to consumerism (credit card debt) or a depreciating asset (auto loans).

Ultimately, the difference maker comes down to interest rates. Your mortgage rate could be around 4 percent while your student loans are floating between 4 percent to percent—but your credit cards, that’s probably crushing your wallet at around 17 percent. 

It makes sense to prioritize paying off your credit card debt as aggressively as your budget allows. But mortgages or even student loans could be put on autopay in lieu of focusing on other financial goals.

The Delicate Balance of Financial Goals

“In my opinion, focusing solely on debt pay down, especially when it's low-cost debt while ignoring your financial foundation, emergency funds, retirement funds, is incredibly short-sighted,” says Tara Falcone, CFP and founder of ReisUP. “Not only does that strategy discount the magnitude of the opportunity cost you incur by not saving and investing now, but it also puts you at risk for further indebtedness in the long run.”

Kevin Matthews, a New York City-based financial advisor, agrees. “Debt is not my primary focus, I tend to organize my financial priorities by the list of alternatives available,” explains Matthews. “So I would put saving and investing before debt because there aren't many options to help me if I am lacking in those two areas. If I need help with my debt I can try to refinance, negotiate the overall amount, consolidate or use a balance transfer depending on the type of debt I have. There is no negotiating if I don't have enough invested.”

Like Matthews strategy with evaluating options, 24-year-old Sequenza Howes-Williams decided against aggressively down her $30,000 student loan debt because she’s eligible for the Teacher Loan Forgiveness program. She also elected to pay off her debt more slowly in order to preserve her cash flow and create some saving reserves. “The reason why I am not paying aggressively is because I am afraid I will take all of my money to pay debt and leave myself with not enough to survive which will land me in greater debt,” says Howes-Williams.

Investing While in Debt

Putting off investing for years as a way to funnel every extra dollar to your debt could actually end up doing more harm than good, especially if it’s low-interest rate debt.

“You do have to realize that at the end of the day you're going to need time for your investments to compound and grow,” says Matthews. “The longer you wait the less you'll ultimately have.”

There’s one time in which you should absolutely be prioritizing paying off debt.

“High-interest rates on credit cards will erode your financial life faster than investing can improve it,” says Falcone. “In nearly every other scenario, however, the answer is absolutely yes (you should be investing). You need to take care of Future You while addressing Past You's debt obligations.”

What’s Your Debt Tolerance?

Ultimately, a lot of this decision comes down to knowing your debt tolerance. If debt is keeping you up at night, even low-interest rate debt, then go ahead and prioritize debt repayment. Sure, you should still have an emergency fund of at least $1,000 and it’s wise to take advantage of any employer-matched retirement plan, but if getting debt free motivates you to take control then make it a priority. But if you’re comfortable with some debt, have other short and medium-term goals, then it probably makes more sense to strike a balance. Pay more than the minimum due on your student loans and set up bi-weekly payments so you’re still saving yourself time and interest while also saving and investing for other goals. 

Another consideration: investing and balancing in other goals don’t have to cost you a lot.

“The key here is that investing doesn't have to be monetary; you can invest in yourself and your future while paying off debt,” advises Falcone. “Take free or affordable skills-broadening training online. Educate yourself about investing now so you're prepared to hit the ground running once you reach a more manageable place with your debt.”