Frugal Tips

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Is Eliminating Debt Always a Good Idea?

Jun-24-2016 By Frugal 101

Even though I am an advocate of debt free living I have to admit that sometimes there are situations when eliminating debt may be a mistake.

Here is what I am talking about.

Some people start obsessing about reaching their debt free goal and make common mistakes which make them lose money. Before you start paying your debt off, make sure you set your priorities straight and your debt in the right order. If you are targeting the wrong debt such as your mortgage before you pay your credit cards, car and student loans you will end up wasting both time and money because mortgage debt is usually low interest AND tax deductible while the other debts are not.

Eliminating debt is not the best idea when you are not saving any money towards your retirement. If you are employed there is a good chance that your employers match half of your 401K contributions. If you are not putting anything towards your future you are losing free money from your employer. Don’t let this opportunity slip away because most likely you will be saving more money this way instead of just putting them all to pay your debt off.

Before making any decisions check your plan, your debt and your interest rates, so some math and make a decision based on that.

Another bad idea is to take out your 401K or IRA savings to pay off your debt fast. If you do that you will lose a great amount of money on penalties and taxes. In most cases this is not worth it.

Also, if you lose your job you may have to pay back a 401K loan, which is the last thing you want to do when the money is tight.

Being free of debt is an amazing feeling, but just like with anything else you should never obsess about it. Otherwise you are in danger of making unwise decisions and making your life more difficult.

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