Building assets makes people happier than paying down debts, according to a study of 3,751 people aged 30 to 80.
I suppose we are so used to having large debts like mortgages, personal loans and outstanding credit card balances we hardly notice the red ink on our balance sheets.
On the other hand, seeing a stock or real estate portfolio increase in value – or simply having a higher bank or pension balance – gives us a buzz.
Running the numbers can help us decide whether saving/investing or reducing debt makes financial sense.
But that feeling of satisfaction/happiness is also worth something.
Ideally, then, factor both into your decision about where to put surplus funds.
Measuring happiness is an inexact science, but the financial formula is simple: which approach yields a higher after-tax return?
Paying off an outstanding credit card balance costing you 18 per cent interest is the same as earning a guaranteed, worry-free, after-tax return of 18 per cent.
You are unlikely to find a comparable investment.
(Simplified calculation: A $1,000 debt costs $180 a year. “Invest” your $1,000 into the loan, and you will have an extra $180 in your pocket = the guaranteed return; there’s no tax on saving money.)
However, if you are looking at paying down a three-per-cent mortgage more quickly versus making an astute investment, you could realize more than three per cent after tax.
Still not clear on which way to go?
Then do both: You could invest half your money and use the other half to reduce your most expensive debt.
Or even better, put all your money into an RRSP and use the tax you save to pay down the debt.
Note that if your debt load is steadily increasing, you struggle to make the minimum monthly payment on your credit card(s) and/or you spend more than half your income on debt payments, you probably have too much debt.
Look at refinancing only if you know you won’t spend the interest you save to run up more debt.
Mike Grenby is a columnist and independent personal financial advisor; he’ll answer questions in this column as space allows but cannot reply personally - email mike.grenby@gmail.com
