Consumer Debt is debt that is taken on to pay for consumption. Typical examples include credit card debt, personal loans, and auto loans. The debt vehicles are all usually used to purchase things that lose value as time goes by. These loans usually have a relatively short duration, higher cost (interest rate, expenses, etc.), and may or may not have a fixed interest rate.
Investment Debt is used to pay for things that increase in value over time, or things that improve income potential. Examples include mortgages, student loans, and business loans. These loans are generally longer term with fixed interest rates for a certain period of time and clearly defined times and circumstances for changes in loan terms.
I currently carry only one example of consumer debt in the form of a car loan. All the rest of my debt is investment debt: student loan, mortgages, and credit card debt that was used to pay for home improvements. All of my debt, consumer or investment, has an interest rate of less than 6.625%. My consumer and credit debt is all less than 5.5%
I have been working hard to pay down my low interest debt. I have been paying far more than the minimum on my car loan for some time now, and plan to finish paying for it in just over a year. In the mean time I will be making some progress on my other debts as well. Once the car loan has been paid off, I plan to put all that money towards my other debts in classic snowball fashion.
When I am done paying for all of that debt, my plan was to start a new car fund, increase my emergency fund, save for a down payment on a single family home, and put anything left in long term investments. Some people might suggest that I use some of the money to pay down my mortgages early. Being mathematically minded, I have often felt that the best course of action is not to pay down a mortgage early, but instead to take the money that I would be putting into paying down the mortgage and instead put it into a stock market index fund. Since the market, on average, earns more than the interest on my mortgage by almost 2 to 1, my money will work a lot harder in the stock market than it will by “investing” in a low interest mortgage.
Lately I have been considering taking this idea one step further: I wonder if I should slow down my debt paydown and take the extra money and put it towards investments that will earn higher returns. Instead of paying $1600 per month towards my car loan, for example, I could instead put $1100 towards the car loan and $500 into a stock index fund. The car loan costs me 5.5%, but the market (in time) should return closer to 10%. The car will get paid for a little slower, and I’ll be that much closer to my savings goal of 20%. Clearly I could extend this even further and reduce my aggressive debt paydown even further.
On the flip side, once I have my “small debts” paid off, I’ll be in a more secure financial position because I won’t have to worry about paying them if my income should dry up for some reason (layoff, extended illness, etc.).
So the question is: Does it make sense to slow down the payoff of a mix of Consumer and Investment debt, all at relatively low rates, in order to increase my savings rate, which should over time result in much higher returns than the interest payments on the debts? What do you think and what would you do in my situation?
Each piece is precious. Ok, you don’t have to save every piece, but if it’s bigger than a 1″ x 1″ square it’s worth saving. If you have a good system to organize your scraps by color or theme you can use them later to make cards, punches and small die cuts. A technique I love is 
