How to balance saving vs. paying off debt

Brian Portnoy, found of Shaping Wealth, joins TheStreet to discuss how to handle saving for the future vs. paying off debt now.

Transcript

00:00 Now there seems to be a tug of war, a balance between saving and paying off debt.

00:07 And so dealing with debt can be a major source of anxiety for many people.

00:11 So what are some psychological tips for managing debt and staying motivated to pay it down,

00:18 also as you're keeping your eyes on your plans for savings?

00:22 Yeah, it's a great question. Unfortunately, there's not a perfect algorithm here.

00:28 It's very much something that the individual investor needs to sort out for himself or herself,

00:36 because the implicit question that you're asking is, should you focus on the now or

00:41 should you focus on the later? Well, we want to do both. And sometimes we just have to be honest

00:47 with ourselves and appreciate that there are trade-offs. If we have a lot of debt that is

00:55 at a very high interest rate and we let that go, it could compound into a very large problem.

01:02 So sometimes we need to make that longer-term sacrifice to deal with those problems today.

01:07 If there's any way possible to both pay off some elements of the debt now while also investing for

01:14 the long term, that's the best of both worlds. But I wouldn't want to say that that's easy.

01:19 It really requires honesty with oneself, a real insight into your current financials,

01:26 and how much money do you have coming in, how much money do you have going out, and what hard

01:31 decisions you might need to make from a budgetary perspective in order to serve the now as well as

01:36 the later. So is there a reasonable strategy, a reasonable way to do both, to pay down debt and

01:46 also save for a rainy day? Sometimes saving for the rainy day is actually to pay off the debt.

01:50 You're so right. You can do both, but again, the devil's in the details. So if you've got

01:59 debt at a very, very high interest rate, you want to begin to try to pay that down so it doesn't

02:05 get out of control. But if you've got some credit card debt, if you've got mortgage debt, things

02:11 like that, well, this is where the plan comes in. You can model out, you can see, and it's not

02:18 particularly complicated, you can see what the payments are going to be, you can see what the

02:23 interest is going to be. And so making an investment and paying that off somewhat while also

02:29 investing in your rainy day fund, they're both very powerful. Because if all you're doing is

02:35 paying off your near-term debt and you're not at all saving for the future, investing for the

02:41 future, especially retirement, you could find yourself in a pretty tough spot down the road.

02:46 So getting it all down on paper, having transparency, basically bringing sunlight

02:52 into the financial planning process so you know what you own and what you owe,

02:56 then you can begin to make the decisions, appreciating that these are hard decisions

03:00 that all of us have to make every day.

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