Teach your children when to save.
Sep. 28, 2015 Whitepaper

Educating the Next Generation: When to Save and When to Pay Down Debt


Paying down debt can be tedious and discouraging. Many people believe that paying down debt should be their first priority, even before saving or investing. However, that’s not always the case. Depending on your particular financial situation, it may make sense to save the debt and begin investing now. 

The type of debt matters

Whether it makes more sense to pay down debt or begin saving, depends on the type of debt you carry. It is important to first separate debt into three categories in order to assess your overall situation.

  1. High-interest debt – Credit cards and any loan that has an interest rate higher than 10 percent is considered high-interest debt. It is important to pay off this debt before anything else to avoid those high interest rates.
  2. Low-interest debt – This debt has a slightly more manageable interest rate. Generally car loans and personal lines of credit fall under this category.
  3. Tax-deductible debt – Student loans and mortgages are considered tax-deductible debt. Many of these loans have low interest rates and quality for tax deductions.

It’s critical to keep yourself employable

While it is important to pay off high-interest debt as soon as possible, it is also important to ensure you have a good financial safety net. Before you begin paying down debt, it is wise to set up an emergency fund. This fund should be large enough to cover at least three months of expenses. Once you have established an emergency fund, you can comfortably start paying down your debt.

Don’t miss out on your 401(k)

When paying off debt, it is also important not to miss out on participating in your employer’s 401(k) plan. This is especially vital if your employer offers a matching contribution, as you don’t want to miss out on “free” money. Be sure to contribute at a level that allows you to receive the full company match. For example, if your employer matches 50 percent on the first 6 percent of your contributions, you’ll want to defer at least 6 percent from your paycheck into your 401(k).

View your debt as a low-risk investment

Individuals who do not carry any debt generally have a diversified portfolio of high- and low-risk investments. If you have debt, you can count your low-interest, tax-deductible debt as your low-risk investments. Although you are paying an interest rate instead of earning one, you are still shrinking your debt and adding to your overall net worth. Therefore, you may have more room to take on slightly more risk in your other investments.

Choosing to save over paying down debt is a personal decision. Your advisor can help you determine your risk tolerance, comfort level with debt and the balance that’s right for you. For more information on paying down debt versus investing, please contact your wealth advisor.


This document is for informational use only. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Kaiser Hoffman does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.

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