Why Now Is THE Time To Pay Off Your Debt

If you’ve been to the store lately or filled up your gas tank, you were undoubtedly shocked when it was time to pay. Gasoline and food, the two consumables we cannot do without, have increased dramatically over the past year. Pretty much everything else has as well, from construction materials to new (and used) cars. This price rise is known as inflation, where the price of a good or service “inflates” to a higher price due to increased demand in conjunction with limited (or even the same) output or because of traditional demand in conjunction with a shortage of goods or services. Regardless of which reason, all consumers feel the pain of spending more for the same products they traditionally buy, but at a much higher price. To add insult to injury, if income hasn’t risen proportionately with the increase in prices to pay for the increase, spending from another part of the family budget will probably have to be curtailed (usually entertainment). 

I touched on inflation in my first post (“Explaining Debt: The nine-hundred pound elephant in the room”), stating that consumer spending was increasing in the face of extremely low interest rates, fueling an increase in housing and giving confidence to the consumer in other spending. While that has indeed happened, another factor in increasing prices has to do with a shortage of goods due to last year’s lockdowns and/or decreased production due to Covid. Supply lines still haven’t caught up with the demand, and it’s unknowable when they will. If they do, inflation will be “transitory”, meaning it will eventually subside as production matches demand. If production costs continue to climb in the face of demand, inflation may be around for a while. 

The fact is, inflation is running at a 13-year high (as of September 2021), at an annualized rate of 5.4% (tradingeconomics.com). This is significantly higher than the long term average of 3.22% and last year’s rate of 1.37% (ycharts.com). While most economists (as well as the Fed itself) aren’t sounding the alarm yet, taking a “wait-and-see” approach regarding if this is demand-driven inflation or constricted supply inflation, prices will probably continue to rise.

So what’s this got to do with paying off your debt? Well, if the Fed decides inflation isn’t transitory, they will probably start paring back their Treasury bond and mortgage-backed securities purchases, which will allow interest rates to begin to rise. If those measures don’t have the desired impact, interest rate hikes (not done since 2019, pre-Covid), will undoubtedly be next in an effort to cool the economy. Once interest rates begin to rise, the cost of purchasing on time rises as well, as borrowing costs for mortgages, auto loans, credit cards and personal loans rise in not-so-subtle proportion. Any type of variable loan (credit cards, variable rate mortgages, some student loans) will be fair game for increased costs which, as stated earlier, will have a direct impact on the family budget. 

So why is now the time to pay off your debt? At present, most interest rates are still relatively low, so there’s still time to put a plan in place. Additionally, the timing of the Fed to raise rates is debatable, so the sooner a plan is adopted, the more time you’ll have to get out of debt. The fact is, once rates start rising, the “all-clear” is implicitly given to financial service companies to raise rates as well. When this happens, if you carry any variable rate debt, your budget will surely feel the impact, as more income goes to service that debt (interest). Even if you don’t have any variable rate debt (only fixed rate debt), once inflation starts, it may take on a life of its own, raising prices across all sectors. Since inflation raises the costs of goods and services, more income will need to be used for daily expenses. Therefore, by paying off even fixed rate debt, more income can be redirected towards more constructive uses, such as retirement savings. 

The question then becomes, which plan should be utilized to accomplish becoming debt-free? One of the services I offer is the Your Family Bank concept, which pays off ALL debt on an average of approximately nine years. After the debt is paid off, this same program can then be used to become your personal “bank”, allowing you to purchase items you’d normally use a traditional bank or creditor for (vacations, furniture, even cars, etc.). Upon retirement, properly funded, an income stream can then be taken from this same account as another source of income. By the way, this concept also works for your business debt as well, offering the same benefits for your business.

If you’d like to learn more about the Your Family Bank concept and see how it can benefit your specific situation, please contact me at d.babecki@db3insuranceservices.com or give me a call at 941-704-3134. As always, thank you for reading and let me know how I can be of service.

The above article reflects the opinions and thoughts of David J. Babecki. The information contained in this material is believed to be reliable, but not guaranteed. It is for informational purposes only and is not a solicitation to buy or sell any products which may be mentioned. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.

Please note: All guarantees and/or promises are based on the claims-paying ability of the respective insurance company.