Pay Down Debt Or Save? The Spock Vs. McCoy Debate

From Forbes
By Chris Farrell
April 30, 2013

An age-old problem in personal finance is whether to focus on paying down debts or increase savings.

The tradeoff between eliminating mortgage, car loan, credit card and other payments versus socking away money for emergencies, college and retirement becomes especially acute for boomers. The reason: Time is short. (By the way, where did the time go?)

So, what do you do? Follow the rule of thumb that says don’t retire until your debts are extinguished? Or worry less about debt and more about adding to savings so your investment gains will, ideally, boost your financial flexibility and living standards when you decide to stop working?

The Tricky Tradeoffs

Of course, even though it’s commonplace to talk at home about the trade-off between paying down debt vs. increasing savings, we know the issue is a lot more complicated.

You’ll want to consider which kind of debts you owe. Credit cards? A mortgage? A home equity loan?

It’s also critical to take into account the type of retirement savings accounts you contribute to, especially if it’s a 401(k), 403(b) or similar employer-sponsored plan.

And, as always with personal finance strategies and tactics, the nuances of thinking through tradeoffs matter.

“A healthy frame of mind is to assess: ‘What if I am wrong? What has to happen for me to be right?’” says Jonathan Guyton, a certified financial planner and principal at Cornerstone Wealth Advisors in Edina, Minn.
Zvi Bodie, finance professor at Boston University and co-author of Risk Less and Prosper: Your Guide to Safer Investing, adds, “Especially in the good times, always consider worst-case scenarios.”

Read the full article at Forbes.com.