Pay Down Debt or Save and Invest? Mark Baniszewski, Oppenheimer & Co. Inc. (Guest Contributor)
There are certainly a variety of strategies for paying off debt, many of which can reduce how long it will take to pay off the debt and the total interest paid. But should you pay off the debt? Or should you save and invest? To find out, compare what rate of return you can earn on your investments versus the interest rate on the debt. There may be other factors that you should consider as well.
Probably the most common factor used to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return on the investments than the after-tax interest rate on the debt.
Say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. You would generally need to earn an after-tax rate of return greater than 18% to consider making an investment rather than paying off the debt. If you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 18% isn't good, it may be better to pay off the debt than to make an investment.
On the other hand, say you have a mortgage with a $10,000 balance on which you pay deductible interest of 6%. If your income tax rate is 28%, your after-tax cost for the mortgage is only 4.32% (6% x (1 - 28%)). You would generally need to earn an after-tax rate of return greater than 4.32% to consider making an investment rather than paying off the debt. So, if you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 4.32% is good, it may be better to invest the $10,000 rather than using it to pay off the debt.
Of course, it isn't an all-or-nothing choice. It may be useful to apply a strategy of paying off debts with high interest rates first, and then investing when you have a good opportunity to make investments.
Say, for example, you have a $10,000 credit card balance and a mortgage with a $10,000 balance with rates similar to those mentioned above. If you have $20,000 available to invest or pay off debt, it may make sense to pay off the credit card with $10,000 and invest the remaining $10,000 where you stand to realize a higher rate of return.
When investing, keep in mind that, in general, the higher the rate of return, the greater the risk, which can include the loss of principal. If you make investments rather than pay off debt and your investments incur losses, you could have debts to pay. Will you have the money needed to pay them?
Some other considerations
- What are the terms of your debt? Are there any penalties for prepayment?
- If you have extra money, will you invest it or will you spend it? If you pay off the debt, you will save by eliminating the need to pay the interest on the debt but spending the extra money gains you nothing.
- If your reserve funds were used to pay off debt, do you have an emergency fund, or other source of funds, that could be used if you lose your job or have a medical emergency, or would you have to borrow? If so, at what rate would the borrowed funds be?
Automobile Insurance: UM Coverage - Paul Cavonis
"UM Coverage" is a type of automobile insurance you buy to protect yourself when you are injured in an automobile crash caused by someone else. The "UM" in "UM Coverage" stands for "uninsured motorist" or "underinsured motorist".
Therefore, UM Coverage protects you when you are injured in a crash caused by someone else and that person either has no bodily injury liability coverage or not enough coverage to compensate you for your injuries. It pays for your injuries and damages relating to your injuries, like medical expenses and lost wages. UM Coverage does not pay for property damage to your car. UM Coverage is also available to you if you are hit by a car as a pedestrian or bicyclist, or as a passenger in a vehicle owned by someone else.
In Florida, your insurance company is required by law to automatically make UM Coverage available to you with the same limits as your bodily injury liability coverage, unless you reject UM Coverage or select lower limits in writing. Generally, you may not have UM Coverage limits higher than your bodily injury liability limits. However, you may "stack" your UM Coverage if you have multiple cars. If you purchase stacked UM Coverage, the coverage on each car is added together and the total amount is available to you.
Many people are surprised to learn that bodily injury liability coverage is not required in Florida. Therefore, many people do not buy it to keep their premiums low. Even when bodily injury liability coverage is purchased, many people buy insurance with very low limits (typically $10,000.00). As a result, the odds of you getting into an accident with someone with no insurance or not enough are high. Therefore, you should protect yourself by having UM Coverage. Please call me at 727-397-5571 if you have any questions about UM Coverage.
Estate Planning: Naming the Correct Fiduciary -Dennis DeLoach, Jr. and "Rep" DeLoach, III
An effective estate plan names representatives who can step in to help you upon your death or incapacity. These representatives, known as "agents" or "fiduciaries", are named in your durable power of attorney, health care surrogate, living trust and last will and testament documents. Before naming someone to act as your agent, you should consider many variables to avoid problems.
First and foremost, the agent you name should be completely trustworthy. This means they will act only in your best interest at all times. Many estate plans have been greatly disrupted with untrustworthy agents, such as when a child steals their parent's money with a durable power of attorney. It happens frequently, especially here in Florida. If you do not trust your children, name another trusted relative or even your attorney or CPA.
A trustworthy fiduciary also needs to be able to act impartially towards all beneficiaries. Many families have great discord when a relative's estate is distributed. Problems can be created if one child is named as a personal representative or a trustee over another child and it is known the children did not get along. Beneficiaries have the ability to argue over the smallest of details, especially over personal items with little monetary value. This can delay final distribution, add additional costs and create rifts in families that can take years to heal, if ever.
If a family member cannot act impartially, or you know the children do not get along, you may want to name an independent or professional agent. A professional has the ability to remain impartial, will have investment skills and can avoid acrimony between your children.
Your fiduciary must also be able to act when the time comes. The reality is that helping make someone's financial and healthcare decisions can be a great deal of work. If a family member lives out of town, they must be willing to travel and/or take time off work to assist you. Thus, in creating your estate plan, make sure you have talked your options over with your family. You will also need to name alternates in case your agent cannot serve, for whatever reason.
In summary, naming the correct agent is not always an easy task for various reasons. We are, of course, able to talk with you about all of your options to help you make the best decision possible.