A person who has a mortgage and is left to pay 80,000 euros with a current interest rate of 4.00%. He is a person with a stable job and without economic problems. He has no more debts. And now that the mortgage is under control, the eternal doubt arises
This is a widespread issue is the world of personal finance. End all debts as soon as possible or seek a more profitable investment? Why will you see that some people advise one thing and others the other? Total, it’s a financial issue … or maybe not?
Different Personal Finance Philosophies
The big problem is that there are several different philosophies about personal finances.
In many personal finance sites or books you will see that they usually opt for one of the two, and even for a third philosophy. Let’s say then that there are 3 philosophies about debts within personal finances. And they are:
The idea behind this is that debt means that you become a slave to the money of another person or entity.
This philosophy of eliminating debts as soon as possible , seems fine in some cases, but be careful, since it can leave you very vulnerable if you do it without prior preparation. For example without having created a small emergency fund to cover unforeseen events.
Philosophy ” The only bad debt is the one with a high interest rate “
Economically speaking, it is the most correct philosophy. If you have a low interest rate debt and find a more profitable investment, it is best to invest the savings and not make extra payments to end the debts before.
Also, if the debt is controlled and of low interest rate, you can dedicate your savings to creating a large emergency fund that lasts for many years and saving for expensive purchases, such as a car, and paying it off without borrowing. That way you have more security in the future, even if you don’t focus on paying off your debt.
Philosophy ” Debt can help you improve your finances “
This is the general philosophy of people like Robert Kiyosaki , the author of “Padre Rico, Padre Pobre”.
He uses the debt continuously to invest in something that gives him more profitability and thus get extra money. Robert usually does it with real estate. It is a philosophy very similar to the second but much more radical. It takes a lot of sense for business and investment and very careful planning.
Which one is correct?
I honestly can’t say it. I am not for or against any of the options that I have commented before because I believe it depends on the person. About your employment status, your financial situation, your risk aversion, your knowledge , etc.
Personally, they are a fan of a large emergency fund and eliminate debts as soon as possible. Moreover, I avoid getting into debt forever. But I can see the logic behind other ways of thinking and I can easily understand why you can prefer another way of doing things.
All these philosophies have clear advantages and disadvantages . You don’t make a wrong choice by choosing one or the other. Whenever you’ve spent some time analyzing them and finding out what really works for you.
Dedicate savings to make extra mortgage payments to end it as soon as possible.
Some people offer very convincing arguments in favor of one of them. But they often rely on focusing on a particular attribute of that philosophy, ignoring others.
For example, the philosophy of eliminating all possible debt, focuses on the feeling of security for not having debts but what security is there if an unforeseen expense of a certain magnitude occurs and you do not have an adequate emergency fund to deal with it?
Invest the savings looking for a higher return that pays for the mortgage to earn an extra.
Or the philosophy of Robert Kiyosaki, which focuses on the enormous benefits you can get but what about the economic losses of people who fail to succeed?
Listen to your heart. Your mind may not know all the answers but your heart usually points to the philosophy that is most appropriate for you . Remember, the goal of all these plans is to make sure you are in a better financial situation in the future, than you are today .