At what age should you be debt free?
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The average American consumer has about $ 25,483 in debt on top of their mortgage, and the average homeowner has a mortgage balance of $ 215,655. Their 20s are often mired in student loan debt, their 30s find themselves taking on more credit card debt and mortgage debt. It’s not all that surprising that consumers in their 30s and 40s – who are growing families, buying homes, and typically facing more expenses – have more debt.
But if debt in your younger years is seen as the status quo, what is the best age to pay it off?
The answer, CNBC Select has found, depends on several things.
Kevin O’Leary, Shark Tank investor and personal finance author, said in 2018 that the ideal age to get out of debt is 45. It is at this age, says O’Leary, that you enter the last half of your career and therefore need to increase your retirement savings in order to ensure a comfortable life in your old age.
It’s hard to do, he argued, if you’re still paying other balances.
While O’Leary’s advice certainly puts you in a great position to retire in your mid-60s or sooner, the choice to pay off debt is nuanced, especially for homeowners (more details below). ).
If you have high interest debt, such as credit card debt or a car loan with APR in double digits – it would make sense for you to take O’Leary’s advice and pay it off ASAP. Keeping a balance on a credit card can easily cost you thousands in interest and take years to pay off unless you prioritize a plan of attack.
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It’s no exaggeration: take the Chase Credit Card statement below. With an APR of 25.74%, it would take 21 years for the cardholder to pay off a balance of $ 5,311.57 if they did not. paid the minimum. They would end up paying a total of $ 15,891 including interest.
This money would be much better to earn a person compound interest into a retirement fund over the next 21 years, instead of paying the credit card companies more in interest charges.
However, for lower interest rate credit products like mortgages and even 0% APR auto loans, every borrower needs to make the decision that suits their portfolio and budget.
If your debt is costing you less than what you plan to do in the stock market (based on your portfolio’s asset allocation), a financial advisor may advise you that it’s okay to make lower repayments on the stock market. debt and having more to invest in your retirement fund.
The last The data from the Federal Reserve shows that older consumers take out mortgages long before they retire, especially now that mortgage rates are at an all-time low.
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Mathematical considerations aside, the brokerage firm Charles Schwab advises consumers to consider peace of mind: “… weigh the value of having more money in the bank (or in your wallet) versus not having a mortgage.”
Think what it would be like to still have a mortgage in retirement when you potentially have less income. Then you need to decide if it’s something you can live with. Likewise, if outright ownership of your home and / or having an asset to pass on gives you comfort, keep that in mind when making your decision.
Paying off debt is personal and depends on a multitude of factors. If you’re juggling different types of lingering debt and retirement is on the horizon, consider contacting your financial planner or using free resources to determine how much your debt will cost you over time.
To get started, take the time to understand how your debt could be holding you back from reaching your retirement goals. Start by noting the amount of your debts and use a debt repayment calculator to see how long it might take you to pay it off.
Then take the time to calculate how much you want to save for retirement. Vanguard offers a retirement calculator which allows you to enter your current age, the amount you can afford to save monthly for retirement, and your ideal retirement age. See how much you need to save to reach your retirement goal, then consider how much your debt plan might be holding you back.
If you have high interest credit cards that will take you years to pay off, consider a debt consolidation loan which could give you the option of paying off the debt at a lower APR. SoFi offers personal loans up to $ 100,000 (depending on creditworthiness) to help people refinance their credit cards and other high interest loans.
As for the new debt? If taking out a loan today means you’ll be forced to pay it back after age 45, do the math and determine whether the financing will make your life more stressful or threaten to forfeit your retirement plans. (This goes for all non-essential loans for new cars, big purchases, home renovations, etc.)
And if you already have a mortgage, don’t worry if your APR is low. Stay focused on saving as much as possible to feel like you’re taking the right steps towards that bigger, long-term goal.
Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.