When you have money to save and/or invest during this time of economic uncertainty, it can be challenging to decide how to rank the order of where to put it. With interest rates still near historic lows, how do you make the best decision on where to place your next dollar?
We asked financial planners for their best advice and guidance on saving and paying down debt during the COVID-19 global pandemic. Here are their top strategies:
How you handle this really depends on your situation, says Vrishin Subramaniam, founder of CapitalWe in Arlington, Va. “For those who owe debt on high-interest credit cards but have a stable job, then I would prioritize paying down debt. However, if you feel like your company has been, and is still struggling through this time, then I would recommend saving to build a cushion to face a potential job loss.”
For those with high-interest debt who may not be as secure about their current employment, he suggests looking into refinancing the high-interest debt if at all possible: “If you have debt with an interest rate above 6 or 7% then you may want to refinance so it offers a little more flexibility.”
Pay down debt
In the vast majority of cases – particularly where interest rates are high — certified financial planner Leo Marte encourages clients to pay down debt as a top priority. Marte, who also holds an MBA, is the founder of Abundant Advisors in Charlotte, N.C.
“Although interest rates are low, so are savings rates,” Marte says, “and the stock market does not always guarantee returns. Paying off a credit card, or mortgage is a 100% guaranteed return equivalent to the interest rate owed.”
Another factor people sometimes don’t think about is that debt can add risk to your life beyond the math of interest rates. “If you lose your job, suddenly become disabled, or suffer a personal tragedy you could be left with a debt that you simply can’t pay,” Marte says. That is exactly what is happening right now to millions of Americans who lost their jobs because of the pandemic.” Although many credit unions and other lenders have stepped up to offer relief, this is just a reminder of why it’s important to balance your debt payoff with an emergency stash that is as fully funded as possible.
The case for saving
There are exceptions to prioritizing debt over socking more money away. Saving for specific short-term goals — a new baby, a downpayment on a house, or a medical diagnosis that will require substantial out-of-pocket expenses –argues for stashing cash instead of paying off low-interest rate debts ahead of schedule.
Then there’s the case for simply getting more for your money. Travis Tracy, CFP, EA, founder of Fortitude Financial Planning, says it is best to save with an eye toward investing if your debt is owed on low-interest credit cards or a mortgage.
Since interest rates are so low, instead of making an extra payment to debt that has a low-interest rate, it would be more advantageous to put that money in a taxable brokerage account and invest the money,” Tracy says. “You are more than likely to have a positive net return on your money if you are invested in the market versus paying down the debt early.”
Looking at the 30-year historical return of the S&P 500, he notes, it’s about 8%, with interest rates at about 3%. That means you would net a 5% return on your money by putting it in the stock market.
With reporting by Casandra Andrews