1. What is the relationship of your interest rate(s) (on personal debts) compared to your tax bracket?
If you are paying only 5% interest while paying 31% income taxes, you may be better off putting money into your tax-deductible retirement account at work. If you think of taxes as interest, that’s a 26% difference!
2. Is the interest you pay on your debt tax deductible?
If the 5% interest you are paying is tax deductible and you pay 31% income taxes, then it is really like paying 3.45%!
3. Can you make more money than the interest you are paying?
This is how banks make money. You give them money and purchase a CD. They give you a specified interest rate, and then they turn around and lend the money out at a higher rate. So if you are paying 3.45% in interest and can buy an investment paying 5% in interest, you make money!
4. Do you want to be cash poor but asset rich?
You take all of your money and pay off all of your debt but don’t have adequate reserves for the next time there is an emergency or disaster. When you have to borrow in a panic, you tend to get a poor deal. Imagine a natural disaster happens and your home is affected. You used your life savings to pay off the mortgage on the house. Your home is now damaged so you cannot live there, and you don’t have any money to start over. Due to the damage to your property (or neighborhood) you cannot borrow against your house.
5. Are you debt-free assets appreciating as much as your cash and investment assets?
Do you live in an area where your property values are going up by more than 5% annually? Does your car go up for down in resale value? Cash that is making interest or that is invested may significantly outpace the value growth of your home or vehicle. Consider that rising interest rates and rising property taxes have an inverse relationship with the rise of property values. If you believe interest rates and/or property taxes will continue to rise, then your property values may very well decrease in value or at the very least fail to keep up with inflation. Having cash assets or investments whose performance is not tied to your local community demographics may be a very good idea.