We are certainly living in a time of economic uncertainty that is permeating all levels of our society. For most people, this uncertainty means:
In times of more debt, lack of personal savings, and rising costs, people are faced with a few critical financial choices.
Not paying off debt has long-term consequences.
There are several personal factors that go into determining the right course of action. But then there are also objective financial realities that render some financial decisions objectively better than others. In this article, we'll look into some of those difficult decisions.
In general, times like this are:
To start answering this question, you need to ask yourself another important question. Which costs more: not paying down debt, or not investing?
This “opportunity cost” certainly can go both ways. Unfortunately, if you’re forced to choose between good courses of action because you can’t afford to follow both through, you will end up needing an opportunity cost assessment.
This depends on the type of debt you are dealing with and the opportunities that paying said debt off would take from you.
Example 1: You have some money to spare. You can pay off a credit card with a 19.99% interest rate, or you can begin earning 7% annual compound interest through safe, defensive investments.
Example 2: You have some money to spare. You can pay off your auto loan which carries a 3% interest rate, or you can make the same kind of investments as those in example 1.
In both cases, the economy is the same, including the rate of inflation.
In the case of example 1, it should quickly become obvious that paying off your credit card is the more important goal. Even if inflation were to start rising even further, at a 19.99% interest rate, only the most severe hyperinflation could justify you prioritizing investment over debt repayment.
In the case of Example 2, it’s less immediately clear what you should do.
Regardless of your specific case, there are a few guidelines that will make sense.
When it comes to debt repayments, it pays to focus on the longer-overdue debts and the highest interest rates.
If you’re falling behind on payments:
As far as investing goes, there are no absolute guarantees, whereas debt and interest are always guaranteed. For this reason, starting with debts with the highest interest rates is almost always more prudent than paying off other debts or investing.
There are a few more broad courses of action to consider for building financial resilience during times like these.
Building emergency savings is always a good idea. As financial circumstances grow worse, the need for emergency savings rises.
As we’ve seen, single currencies, commodities, and entire industries can fall rather quickly. The only way to mitigate the damage is to broaden your portfolio. Having too narrow a portfolio places you at a much greater risk of falling into individual financial downturns.
Cutting expenses is hard without taking account of your finances.
Fortunately, there are many free budgeting apps for tracking income and expenses. These apps can:
Using this information, you can begin shifting your spending to better prepare for worsening economic conditions.
Difficult times force us to make difficult financial decisions.
However, there is math behind every financial decision and transaction, and focusing on some areas over others makes sense.
November 30, 2023
November 29, 2023
November 27, 2023