The other day, I had a conversation with another financial adviser
about a program to pay off debt rapidly. She was talking about some of the
strategies and how it could help people.
Her pitch to me was that by using these strategies, I could
help clients find the cash flow to save but most importantly, to get out of
debt faster and clients would then have even more money to save for their
goals. I told her that I already do this with a different program,
but I would be open to hearing more. You never know – maybe her program is
better.
I did laugh to myself a bit. She and I were at a workshop
last week talking about different money principles and her program appears to
go against what we had heard last week.
That principle? Liquidity. According to Merriam-Webster
dictionary, liquidity – the noun – is defined as:
consisting of or capable of ready
conversion into cash or
capable of covering current liabilities
quickly with current assets
What does this have to do with debt? Well, what is the
difference between?
$100,000 in cash, versus
$100,000 in equity in your home
Both are worth $100k, but there is a major difference
between the two. One you can just use whenever you want. The other requires you
to take major action – either sell your house or take out a loan (home equity
or mortgage). And to take out a loan, you have to “ask” someone else – that is,
you have to apply for it, and you aren’t guaranteed to be approved.
Paying down debt or paying off your mortgage isn’t
necessarily a “bad” thing. But the point is here is that you have to consider
liquidity – is it worth paying down that debt versus having the cash available
anytime?
Of course, paying down a credit card or line of credit is a
little different because you can borrow that money right back. But you can’t
with a mortgage, a car loan, or even student loans.
Not understanding this principle is why many people who work
hard to pay off debt go right back into debt when there is an emergency or
major expense. They don’t have cash otherwise to handle that expense, so their
only option is to go back into debt.
Many “pundits” on the internet talk about different ways to
pay down debt and this program appears no different. I would just hate to see
someone put in all of that hard work to simply end up in debt again.
My personal take on this is that paying down debt is just as
important as building up savings. It’s not an either or type of decision. Yes,
this means that maybe you don’t pay down debt as fast as if you only focused on
that. And yes, that would mean more interest paid.
When you pay off those credit cards, you should then just
pay off your mortgage regularly. Don’t send in extra payments.
Why? Liquidity.
What’s your thought on this? Do you agree? I’d love to hear
comments on this below.
Separately, as a reminder, I’m holding workshops on college
financial aid, specifically, “How to Read Your Financial Aid Award Letter”.
Workshops will be held:
Feb 24th
Mar 1st
Mar 3rd
Mar 9th
Details and links for registration can be found at: https://www.facebook.com/longhornfin/events
