Is being debt-free really the be-all and end-all to financial well-being?

Maybe.  Maybe not. 

It really depends on the interest rate.   Conventional wisdom says that you should quickly pay off debts with interest rates higher than 5% above the 10 year T-note rate (which was around 2% as of yesterday afternoon).  So, pay off anything above 7% should be a priority after your emergency fund and getting any company match on 401k contributions.  That’s kind of a no-brainer.  The average return of the stock market is 7%, so absolutely take the guaranteed money saved by paying off high-interest debts quickly.

Lower rate debt is an entirely different beast.  I’m pretty debt averse.  I don’t exactly have Dave Ramsey levels of debt-hate, but I don’t love taking it on.  And if I do take it on, I want to pay it off ASAP.  And credit card debt is a HUGE no-no unless it’s a calculated purchase on a zero-percent interest and I can commit to paying it off at least three months before the interest-free period ends.

Along that line, I did take on a fair amount of debt last year.  In March, a tornado dropped a couple of trees on our house.  The insurance took care of a lot of things, but for various reasons, we decided to go ahead and pull the trigger on some renovations that we’d been wanting to do and borrowed some money to do it.  In November, my husband was in a wreck that totaled the “family car.”  It was paid off, and the insurance covered the loss.  But we ended up replacing it with the same exact vehicle, only with 60k fewer miles.  We borrowed a little bit to make up the difference.  Were these expenditures necessary?  Not really.  Did it make me happy?  Yeah, it kind of did (well, I didn’t really want to replace my car…I loved her…but maybe I’ll get a few more years out of this one with the lower miles).  Both loans are very low interest, around 1-2% (I love my credit union).  The reno loan was also a 12 year loan, so payments are super low.  I never intended for it to take that long to pay it off.  My goal was 4 years and at one point it looked like we might do it in two, but OT has recently dried up.  We’ve been throwing every extra cent we have towards those for the last 10 months and have cut four years and more than $1000 off the interest that we’ll wind up paying back.

The math says that I should be maxing out my retirement accounts before paying these off.  With the extra money we’ve been throwing at them, we still have 7 years left if we only made the actual payment each month.  We have budgeted $1500 per year of base income (i.e. non-overtime or side gig income) to extra payments.  Over seven years that would save us $826 in interest.  But, if instead we made the actual payment and put that $1500 into retirement accounts, assuming that 7% return, we’d earn nearly $2500 in interest over those 7 years.  So we’d earn about three times what we’d save. 

This is where the psychology of money comes into play.  I absolutely know that following the math is the “right” thing to do.  But I hate, hate, HATE being in debt and I keep trying to convince myself that paying off debt is the “guaranteed return.”  I don’t want to make a payment every month (actually every paycheck since it’s a bi-weekly payment).  I want the liabilities column on my net worth spreadsheet to be $0.  But at the same time I want to do the thing that’s most efficient based on the math.  All that to say that I’m having a really hard time pulling the trigger on making this change.  It’s not going to make or break retirement.  By the time I can retire, that extra money should really represent only a small portion of my portfolio.