Debt Repayment
Firstly, thank you everyone for your prayers, patience, and understanding as we navigated the death of my father in June. It was a beautiful time to spend with family as we remembered the life and love of Jerry Martinek.
Secondly, I am focusing on debt repayment for this month’s newsletter. Let’s say you owe $50K and you happen to have $50K in the bank. Should you pay off the debt? That depends on the interest rate: how expensive is it to finance the debt? Many people turn to the total amount paid in interest as their guide, but most of that interest is overly-inflated with future value dollars.
Instead, use a time value of money (TVM) calculation on the future payments to determine what the net present value (NPV) is as a better guide of assessing the expense of financing the debt. I regularly run this calculation for my clients.
In short, the real cost to debt depends on the inflation rate which is an unknown variable. Given the latest interest rates, I consider debt with less than a 5% interest rate to be relatively inexpensive. Anything less than 3% is down right cheap! Debt in excess of 5% should be paid off in earnest.
- Read: This is something that is not often considered, but is truly the right way to analyze what debt you may have: the time value of money (or TVM). Read more here from Investopedia.
- Read: This article from Financial Mentor provides a deeper understanding on net present value (or NPV), as well as an NPV calculator.
- Watch: While this brief video from Harvard Business Review focuses on the net present value (NPV) for investments, the same principle can be applied for debt repayment.
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You can click on the links below to access this month’s resources. Thanks for reading, listening, and watching!