Why Does a Diversified Portfolio Matter?

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Why does a diversified portfolio matter?  Put simply; it helps reduce the risk that you’re taking with your investments.  You’ve probably heard the saying, “Don’t put all of your eggs in one basket.”  That saying is speaking directly about diversification.

What Does a Diversified Portfolio Look Like?

Let’s say that you have $10,000 to invest, and you’ve decided that you want to invest in electric vehicles.  Investing in electric vehicles could mean a lot of things.  It could mean buying shares of Tesla.  The price of Tesla shares is notoriously volatile.  If you invest $10,000 in Tesla and the following day, the market price is up 3%. Then you have a nice $300 gain practically overnight. Although, if the market price of Tesla is down 3% the day after you invest, then you lose $300 practically overnight.

Diversifying Your Investments

Suppose now, rather than investing the entire $10,000 in Tesla, you invest half in Tesla and half in another car company. They also happen to make electric vehicles but have other products and do not have a polarizing and vocal CEO.  The second car company also has a stock price that tends to be less volatile. Potentially because it also has other products and does not have a vocal and polarizing CEO.  On the day after you purchase your shares, Tesla shares go down 3%, and the shares in the other company go up a modest .5%.  In this case, your portfolio would be down $250.  If Tesla shares were up 3% and the second auto company was down .5%, then your portfolio would be up $250.  Your potential gain was reduced, but so was your potential loss.

“Either way, if something happens that affects the auto industry as a whole, your portfolio is likely to decline in value, and neither stock would likely reduce the effect.”

Kellly Ennis – Financial Advisor & Founder of Infinity Financial Strategies
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Now assume that you’ve decided that you also want to invest in something that everyone needs. You choose a company that makes toilet paper (we all learned a lesson during the pandemic) and other products that are considered consumer staples.  Allowing that you split your $10,000 evenly between each of the three companies.  If the consumer staple company has many products and many ways to earn money, there’s a good chance that its stock price doesn’t move too wildly.  Many consumer staple companies have pretty steady stock prices.   

Having this stock in your portfolio can help you have a steady base in your portfolio.  Think of it as ballast in a ship.  It helps mitigate the ups and downs when the ship hits large waves.  This doesn’t mean that the stock price doesn’t go up and down. It just doesn’t usually move as drastically as the more volatile stocks.  This helps reduce the risk in your portfolio because it isn’t particularly volatile. It also isn’t likely to move in lockstep with auto industry stocks.

The Long Haul of Diversified Portfolios

Over the long haul, the market tends to go up.  The problem is that we don’t know how long the long haul has to be.  There will be times when the market is down even though the long trend is upward.  If we could stay invested for “the long haul” and our investments could roughly reflect “the market,” then we should expect investment gains over a long period of time.  It will take quite a few positions in a portfolio to roughly reflect the entire “market.”  There are stocks for roughly 2800 companies being traded on the New York Stock Exchange alone.  That doesn’t include NASDAQ and other exchanges.

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Take Advantage of Market Tendencies

If we can spread out the risk in an investment portfolio, we could potentially have stocks that tend to move in opposite directions.  We could add in bonds, which frequently (but not always) move in the opposite direction to stocks.  And bonds give an additional income source that is not dependent on the stock price. Which is another form of a diversified portfolio.  In addition, we should consider international stocks, both in developed markets and emerging markets.  Business cycles often occur with different timing in other countries. This means some economies will be in a growth period while others may be plateauing or even in a recession.   Portfolios with a good level of diversification would be able to rely on the market’s upward trend. This would then drastically reduce the risk at the same time.

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Diversified Portfolios Matter

If the CEO of Tesla makes a comment online that causes the stock price to decline precipitously, and your entire portfolio is invested in Tesla, the value of your portfolio will also decline precipitously.  To be fair, the reverse is true as well.  If the CEO of Tesla makes a brilliant comment or the company exceeds its target number of vehicle deliveries, causing the stock price to climb steeply, then the value of your portfolio would climb steeply as well.  The question is, can you stomach these wild swings?  Holding shares of multiple companies and investments with differing characteristics can reduce the wild swings in your portfolio value.

In short, diversified portfolios matter a lot when reviewing the full picture of your financial health and portfolio health.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

Essential Household Savings Accounts & Why You Need Them

EVENTS & OPPORTUNITIES FUND

There are a few accounts that households should have set aside for different purposes. We’ve talked about the Emergency fund and the Rainy Day fund, and in the future, we’ll address funds for specific purposes or goals. Today we’re talking about the Events and Opportunities fund.

An Events and Opportunities fund can be helpful to take some pressure off some financial decisions. However, it probably ranks below the Rainy Day funds and definitely below the Emergency Fund in terms of importance.

 

An Events and Opportunities fund is used for things that come up that are unexpected but not emergencies. The event or opportunity would benefit you if you could participate, but it won’t leave you worse off if you don’t participate.

 

Here’s an example. Taylor Swift is currently on tour as I write this article. Tickets for her concerts cost a pretty penny if you can get them, but they have been incredibly difficult to get. Many who anticipated this concert and set aside funds for the tickets haven’t been able to actually get the tickets. You would love to go, and even more so, your daughter would love to go. But you didn’t set aside funds for this financially, and you wouldn’t even know where to start looking for tickets once the usual channels are exhausted. Now, imagine that the day before the concert, you get a call from a friend. They have tickets for the concert, but they have COVID and won’t be going anywhere for a few days. They offer you the tickets at a fair (fair is all relative) price. What do you do? If you decide that you will benefit from going to this concert (enjoyment, memories, etc.), then you use your Events and Opportunities Fund, buy the tickets from your friend, give them your wishes for a speedy recovery, and go enjoy the concert.

 

 

Or, here’s another example. The Smiths decided that they’d like to install a pool next summer. They started getting quotes in the fall and ran into two issues. First, the cost was much higher than they anticipated because pools and their installers became much more in demand during the pandemic. 

 

Second, the pool companies were unavailable until the year after they wanted it installed due to the increased demand. They pretty much gave up on the idea until one of the companies reached back out to them because, as it turned out, they would be installing pools for two other neighbors very close by. Because the equipment and workers would already be in the neighborhood, the pool company would be able to install their pool as well and at a better price than originally quoted, but only if it was at approximately the same time the neighbors were having their pools installed. And the installation date was in the spring, so they would even be able to use the pool the following summer. This meant the Smiths would be able to get their pool, but it would be sooner than expected. Once more, this would use your Events and Opportunities Fund.

 

Other instances would include types of entertainment events, opportunities to travel, and perhaps purchases that didn’t make your list of specific goals but an opportunity that presents itself that is mutually beneficial to you and the seller. In some cases, investment opportunities (well-vetted and aligned with your risk tolerance and overall financial plan) present themselves.

 

Again, this type of fund is intended to take some pressure off financial decisions, but not all. You must decide if the presented opportunity or event is worth your hard-earned dollars. The difference is that if you have the funds for these events and opportunities as they present themselves, you won’t derail the rest of your financial plan.

 

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

Essential Household Savings Accounts & Why You Need Them

Rainy Day Fund

A rainy day fund is different from an emergency fund–but it is still incredibly helpful for your peace of mind.

A rainy day fund is used for those relatively small and somewhat expected expenses that happen, but you can’t necessarily count on the timing. Imagine that your everyday life is a series of sunny days where you go about your daily life following your routine. Rainy days happen now and then and may disrupt your routine. Sometimes the disruption is welcome; sometimes, it isn’t.

Here are some examples of when you might use your rainy day fund.

Depending on your age and stage of life, you probably find that certain events happen in clusters. Weddings, births, graduations–etc. You know that these events may be coming, but you don’t know when. Travel for these events can be expensive depending on when and where they are. And then there’s the cost of gifts. These would be appropriate expenses for the rainy day fund.

Let’s say you have children, and they are on school break. And, you literally have a rainy day–or worse, a string of rainy days. This is when you dip into the rainy day fund and plan an event. It could be a short trip, an educational experience, or just rain boots and raincoats so you can all go out and play in the rain.

Other examples of uses for rainy day funds would be medical co-pays or coinsurance payments and veterinary bills for regular checkups. You might also use the fund for the replacement or repair of small electronic devices, sports equipment, minor car repairs, and home maintenance expenses.

A rainy day fund differs from your emergency fund. Emergency funds are used to help cover large, unexpected expenses like major car repairs, major home repairs or large medical bills. The rainy day fund is used for smaller expenses that you know you are likely to incur, but you don’t know the timing, and you don’t know exactly how much they will be.

So, how much should you keep in your rainy day fund? As usual, with financial questions, it depends. If you have a large family, including your pets, then you’ll want to add more to your rainy day fund to help with those insurance co-pays and vet bills. If you and your household depend on electronic devices(don’t we all?), then you’ll want to add more to your rainy day fund as well. Take a look at what could happen in the next year to help you determine an amount. How old are your cell phones? How likely is it that you’ll need to replace them this year? How about iPads and other devices? What about small home appliances like coffee makers and toaster ovens/air fryers/etc., that you depend on? How much is the deductible on your car insurance? This is the amount that will come out of your pocket if there is an event involving your car. How about the kid’s activity levels? Will their activities likely lead to expenses like new sports equipment (or medical co-pays)?

The rainy day fund, like the emergency fund, helps with peace of mind. You can design your spending plan and account for all of the regular expenses.

However, everyone experiences unplanned–though

not necessarily unexpected–expenses from time to time. Your rainy day fund can help you cover those expenses without derailing the rest of your financial plan.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

BENEFITS TO HIGHER INTEREST RATES

By now, you’ve undoubtedly heard that “the Fed” has been raising interest rates to rein in inflation. Interest rates are an essential part of our economy, and their impact can be felt by nearly everyone who participates in financial activities. The federal reserve raises interest rates to restrict access to funds and hopefully slow down the rate of increase of prices, including wages, in the economy. While this sounds like an awful idea if you are a borrower or have used access to cheap money to grow your business, higher interest rates can positively affect savers and lenders. If you are a saver, higher interest rates mean you can earn more money on your savings. This can be really helpful if you are saving for a specific goal, such as buying a house, starting a business, or saving for retirement. With higher interest rates, your savings will grow at a faster rate, allowing you to reach your financial goals sooner. Another advantage of higher interest rates for savers is that they can help to combat inflation. Inflation is the rise in the cost of goods and services over time, and it can erode the value of your savings. In other words, if the prices of the goods you buy rise faster than the value of your savings, your savings can’t buy as many goods. However, if you are earning a higher interest rate on your savings, you can offset the effects of inflation and maintain the purchasing power of your money. For lenders, higher interest rates mean that they can earn more money on the loans they provide. This can be particularly beneficial for banks and other financial institutions that make a significant portion of their revenue from interest on loans. Higher interest rates can also encourage more lending, as lenders are more likely to provide loans when they can earn a higher return on their investment. And, when you purchase a bond, whether a government bond or corporate bond, you also become a lender and can benefit from higher interest rates. Retirees and others who live on fixed incomes are often savers and lenders—a large part of their income is often the interest generated from savings deposits and bond interest. After nearly a decade of extremely low interest rates, these new higher interest rates are a real boon to those living on fixed incomes. Another advantage of higher interest rates for lenders is that they can help to stabilize the economy.  When interest rates are low, borrowing becomes cheaper, and consumers and businesses are more likely to take on debt. However, this can lead to an increase in inflation and a potential economic bubble, and in some cases, poor management decisions. Low interest rates can allow a company which is either poorly run or may not have an economically feasible business model to continue operations simply by borrowing cheap money. By raising interest rates, lenders can discourage excessive borrowing and prevent an economic crisis. Higher interest rates will have a different effect on savers and lenders versus borrowers. Savers can earn more money on their savings, combat inflation, and reach their financial goals faster. Lenders can earn more money on loans, stabilize the economy, and prevent potential economic crises. While borrowers may have to curtail spending in order to accommodate the higher cost associated with borrowing. While there may be some drawbacks to higher interest rates, the benefits for savers and lenders are significant.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

IMPACT OF HIGHER INTEREST RATES

While higher interest rates can be beneficial for savers and lenders, as we discussed in our last post, there are also several drawbacks to consider. In this blog post, we will explore some of the potential disadvantages of higher interest rates.

One of the most significant impacts of higher interest rates is that they can lead to increased borrowing costs for consumers and businesses. When interest rates rise, it becomes more expensive to borrow money, which can reduce consumer spending and business investment. This can lead to decreased economic growth, as businesses are less likely to expand and hire new employees. In fact, the employment numbers and wage levels are key economic indicators the Federal Reserve is using to determine when and the degree to which they should raise rates. 

Higher interest rates can also have a negative impact on the housing market. When interest rates are high, fewer people can afford to buy homes, which can lead to a decrease in demand and a drop in housing prices. This can be particularly problematic for homeowners who are looking to sell their homes for those who are in the process of buying a home. In some cases, it leads to consumers feeling “trapped” in their current homes because they currently have low fixed mortgage rates. Because mortgage rates are so much higher than they were just a few years ago, taking out a loan of the same size as the original loan to buy a new house can lead to a drastically higher mortgage payment.

Another potential drawback of higher interest rates is that they can lead to a decrease in the stock market. When interest rates rise, investors may sell their stocks and invest in safer, fixed-income securities such as bonds. This can cause a decrease in demand for stocks, which can lead to a decrease in stock prices. In addition, higher interest rates increase the price that businesses pay to borrow. Businesses that rely on cheap money (low-interest rates for borrowing), they may be unable to sustain the growth that they’ve had. And in some cases, a company may not be able to continue operations if the money it borrowed was subject to floating or variable interest rates and the payments have now simply become too large for the company to continue making payments.

Higher interest rates can also lead to an increase in the value of the currency. When interest rates rise, foreign investors may be attracted to invest in the country, which can cause an increase in the demand for the currency. While this may seem like a positive outcome, it can also make exports more expensive, which can harm businesses that rely on international trade.

Finally, higher interest rates can lead to an increase in the national debt. When interest rates rise, it becomes more expensive for the government to borrow money, which can lead to an increase in the national debt. This can have long-term consequences for the country’s financial health and can lead to a decrease in government spending on programs, including healthcare and education.

While higher interest rates can have benefits for savers and lenders, they also have several drawbacks to consider. These include increased borrowing costs for consumers and businesses, a negative impact on the housing market, a decrease in the stock market, an increase in the value of the currency, and an increase in the national debt. When considering the impact of higher interest rates, it is important to weigh both the potential benefits and drawbacks before making any financial decisions.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

INTEREST RATES AND ECONOMIC CYCLES – WHAT’S IN IT FOR YOU?

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Interest rates and economic cycles–What’s in it for you? Economic cycles are characterized by alternating periods of expansion and contraction in the economy. These economic cycles can have an impact on interest rates, and, in many cases, the level of interest rates affects economic cycles. Right now, the federal reserve and other central banks have been raising interest rates in order to increase the cost of borrowing and hopefully slow down an overheating economy. As we discussed in our last two blog posts, there are benefits and drawbacks to individual consumers and businesses of these higher interest rates. Today, we’re going to look at how you, as a consumer, can set yourself up to take advantage of both high and low-interest rates. Not too long ago, interest rates were low–very low. If you purchased a home with a fixed-rate mortgage or perhaps refinanced a fixed-rate mortgage during this period, you might have borrowed at rates around 3%. Now, you can get 4% on your money just by leaving it in a savings account. And, after a year when the S&P 500 dropped about 20%, a 4% return sounds lovely. During those years of low-interest rates, finding places to get a decent return on your money with relatively low risk was difficult. When investing, we look for an appropriate risk-adjusted return; in other words, we expect a higher return if we take on more risk. Interest rates were so low that many savers became investors simply because they couldn’t get a decent return on their money by saving and lending. They had to take on more risk to get a decent return. And fortunately for them, we experienced the longest bull market in history from 2009-2020. With higher interest rates, you have to do more of a balancing act between investing in equities like stocks or lending like purchasing bonds or other debt instruments. In an ideal situation, you would have funds to deploy in each case as soon as the balance shifted such that your comfort level (your risk tolerance) could be met and your desired level of return could be achieved. However, we don’t have crystal balls and don’t know if any given economic event is a blip or the beginning of a new trend. As interest rates have increased over the last year, we’ve never known if we have already hit the top. If we’re at the top of the curve, then, as a lender or saver, you would want to lock in return for as long as you can.
On the other hand, if you lock in and then interest rates rise again the following week, you may be kicking yourself. Or, if you recognized that mortgage rates were at their lowest in 2020, you could have locked in a nice, low cost of borrowing for 30 years. At the same time, if you believe that we’re at the top of the curve, you also have to think about how long you think interest rates will be high. If you believe that interest rates will start dropping in the near future, then you may want to start investing again on the theory that easier money conditions will allow for accelerated business growth. The point here is that it is important to consider how economic cycles affect your individual financial situation. The “set it and forget it” method of financial planning may look like it works out for some folks. And, perhaps from a behavioral economic perspective, it has worked i.e.-they didn’t withdraw from their 401k because they weren’t thinking about their 401k. But, with a little attention, they may have been able to either reduce the risk in their portfolio or increase the return. Borrowing when the cost of borrowing is low–such as taking out or refinancing a mortgage–and lending when interest rates are high–such as purchasing treasuries and other bonds–is one method of taking advantage of the interest rates as we go through economic cycles.
Setting yourself up to make the most of interest rate changes is just one strategy you can use to reach your financial goals. Increasing or decreasing interest rates isn’t bad or good without context. It does come down to how you take advantage of them.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

Benefits of multiple income streams

Having multiple income streams is helpful for several reasons:

Diversification of income:

When you rely on a single income stream, you are putting all your eggs in one basket. If that income source is disrupted for any reason, such as a job loss, a market downturn, or a recession, you could be left without any means of support. By having multiple income streams, you spread out your risk and decrease your dependence on any one source of income.

Increased earning potential:

By having multiple income streams, you have the potential to earn more money than you would with just one income source. This is especially true if you can create passive income streams that continue to generate income even when you’re not actively working.

Flexibility and independence:

Having multiple income streams gives you more flexibility and control over your financial life. You can choose which income streams to focus on and how much time and energy to devote to each one. This can give you greater independence and a sense of control over your financial future.

Protection against unexpected expenses:

Multiple income streams can also provide a buffer against unexpected expenses or emergencies. If one income source is disrupted or reduced, you can rely on other income streams to help cover your expenses and maintain your standard of living.

Overall, having multiple income streams can help you achieve greater financial stability, independence, and security, and it can also provide a pathway to higher earnings and greater wealth over time.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

Considerations for higher interest rates

Now that the Federal Reserve raised interest rates seven times in 2022, there are some factors that you should consider in your financial planning.  When it comes to interest, it makes a difference whether you are a borrower or a lender.  We’ll talk about the factors as a lender, or saver, in today’s post.  Stay tuned for our next post on considerations as a borrower.

After a decade of extremely low interest rates, we finally have interest rates that can help savers.  Here are a few areas where some adjustments to your plan may be in order.

Is your money working for you?

Did you know that, as of February 2023, you can get 3.75% APY on your savings account at a large national bank and even higher if you go with some regional banks?  That means you can earn $375 on $10,000 of your emergency fund just by having it in one of these accounts.  On the other hand, many of the large national banks are still only paying .01% on their savings and money market account.  So, you can earn .01% or you can earn 375 times that amount by looking around for better interest rates.

Reconsider your accelerated mortgage payments

Have you been making additional principal payments on your mortgage to pay it off more quickly?  If your mortgage interest rate is at 3.25% and you are earning 3.75% on your funds in the bank, you may want to take the extra funds that you’ve been dedicating to mortgage payments and earn more on those funds in the bank.

How about your tax return?

For at least a decade, interest rates were close to zero.  Aside from avoiding giving your hard-earned money to the government any sooner than you needed to, there was little reason to ensure that you weren’t withholding too much from your paycheck in income taxes – unless you were actually investing.  Now that we have reasonable interest rates, you could be earning interest on those dollars.  The government doesn’t pay you interest on those dollars unless they unnecessarily delay your tax refund after you’ve filed your tax return.  So, now it has become a question of whether you earn interest on those dollars or the government earns interest on your dollars.  The caveat here is that you would need to put those extra dollars where you’ll actually earn the interest income rather than spending the extra dollars.

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.

Myth: It’s always better to pay down debt as fast as possible

This post is part of our financial myths series

You may have heard that it’s always better to pay down debt as fast as possible. There are two huge flaws with this advice.

Here are some factors to consider.

What do interest rates look like?

What if you were able to take out a loan at 2.5%? And, what if at the same time you were able to generate 5% on your investment portfolio? Does it make sense for you to take funds that could be in your investment portfolio and earning 5% to pay off the loan at 2.5%? Possibly not.

Considering things like mortgage interest deductions and barring any additional costs of carrying the loan, you will come out financially ahead by taking your time to pay down that 2.5% loan.

Money is extremely personal

Money and finances are extremely personal matters. Your money story and your history with money is different than anybody else’s. For some people, having any kind of debt induces anxiety. It doesn’t matter if they could pay off their debt 10 times over and there is little or no chance of having their home foreclosed upon, their car repossessed or having levies on their income, they just don’t like having debt. In these cases, it really may be the best thing for these people to pay down their debt as fast as possible. It’s very hard to put a price on personal contentment-or determine the cost of personal anxiety.

Risk tolerance

For some folks, there is a great deal of uncertainty about their financial situation. For instance, their income might be very variable – changing from month to month and year to year. Those folks are already tolerating risk in their variable income. They may not want to take on the additional responsibility of those principal and interest payments. In those cases, it might be helpful to pay down debt when the cash is flowing. That can help reduce fixed payments and make life a little easier during those low-income periods of time.

The same thing goes for those who are getting ready for retirement. If cash and income needs during retirement will be met easily, then it may make more sense to look at this question with strictly black-and-white benefit and cost numbers. In other words, if the return on investments is significantly higher than the cost of interest on the loan, it may make sense to pay off the loan slowly. Use those funds to get the higher return on investment. Use part of that return to pay the interest, and you still come out ahead.  On the other hand, if there is uncertainty about steady income during retirement, and especially if we are talking about the family home, you may want to have any indebtedness on the home paid off prior to retirement. Yes, there will still be ongoing expenses related to owning the home like upkeep and property taxes, but at least the monthly mortgage payments could be eliminated.

For the most part, we are talking about debt with fixed interest rates. There is additional risk if the interest rates are variable. Variable mortgage rates, credit card debt and lines of credit often come with variable interest rates. This means that while you may have felt that a monthly payment was reasonable when you took on the loan, and increased payment due to higher interest rates could be crippling. In those cases, the simple financial calculation showing costs and benefits needs to be balanced with the additional risk.

Using leverage

Remember, this is intended to be educational – not advice. In direct contrast to the notion that you should always pay down debt as quickly as possible, many successful investors actually take on debt just to build their investment portfolios. In other words, if they believe that they can get a better return on their investments than the cost of borrowing money to make those investments, they choose to incur the debt. They may do this even if they had cash readily available to make those investments. Because on the spreadsheet, with just black and white numbers, it shows a positive return. Again, this is just for educational purposes, not advice. These investors are taking on a serious amount of risk. They could lose their own money as well as borrowed money which they still have to pay back – with interest. But again, this strategy flies in the face of the notion that one should reduce their debt as quickly as possible.

I think the most important factor here is that money is very personal. Everyone handles money differently. Money affects different people differently psychologically. Some people get anxious having any kind of debt, while others look at it strictly as a tool to grow their wealth.

I think this is a prime example of making sure you are making informed decisions. Calculate the actual financial cost of carrying the debt versus any potential gain on the use of those funds. But ultimately, it comes down to how much risk you can tolerate and how comfortable you are holding that debt.

 

This article is intended to be educational and thought-provoking rather than financial advice.  When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals.  During our financial planning process, we examine these factors and many others to determine appropriate financial strategies for YOU.