Retiring Debt Might Be Best Use of Extra Cash

Financial advisors tell clients who are fortunate enough to be accumulating cash to consider paying off debt rather than investing or saving the money.

More Americans may be taking that to heart: U.S. consumer debt outstanding, excluding mortgages, fell at a 2.8% annualized rate in December, the biggest decline in more than a decade, according to the Federal Reserve. January data haven't yet been reported.

David Wyss, chief economist at Standard & Poor's in New York, said he considered investment options after receiving his 2002 bonus in January and instead decided to pay off most of a small mortgage on a vacation home in Massachusetts.

Retiring debt "is the best use of money for some people," Wyss said.

Financial planner Gary Caine of Bruck & Caine Advisory in Culver City agrees, especially in the case of investors who are building up cash in short-term accounts.

"Why would you put money in an account earning 2% or less if you're paying 6% to 18% on debt?" he said. "It's a bad economic decision."

Of course, that could depend on a person's long-term view of investment returns and interest rates. If you believe that rates are going to rise, it might make sense to keep a long-term loan that costs, say, 7%, if you assume that you could earn more than that in the stock market.

The math can be most favorable toward keeping debt in the case of home loans with interest that is tax deductible.


-- Tom Petruno

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