Adapted extract from the Good Guide to Finances at 40.
There’s the midlife paunch, and there’s the midlife debt. Both are equally stubborn and exacerbated by over-indulgence.
If you have a decent income and some spare cash, your chances of paying off a few niggly credit cards and loans are good. You might, therefore, want to consider investing at the same time as paying off debts. Done sensibly, investing might even reduce your debts over time.
This is because we are in a low interest rate environment where it is possible to also earn much higher returns through some bonds or stock market investments, although you have to be pretty confident with your return calculations to adopt this strategy and keep in mind the risk of rises in interest rates at some point in the future.
If you have debts but also decent income and a bit of spare cash, you are not alone. Debt is not the preserve of the disadvantaged – far from it.
In fact, the older and higher income you are, the more likely you are to have credit extended to you. So by midlife, rather than having paid it all off, you are in fact likely to have more, even if it isn’t troubling you.
Whether this is comfortable for you or not depends on your personal goals and means. If you are thinking about saving more for your children and retirement, then annoying credit card and loan repayments can seem to get in the way.
Debt is such a fact of life now that if you were to wait until you’d cleared it all, it might be too late to start investing.
If your debts are manageable but you would like to clear them and also start saving, here are three top tips, from Olivia Bowen, partner at Castlefield, the responsible IFA, and one of the Good With Money experts:
- Make sure you aren’t paying more interest than you need to.
- Don’t necessarily wait until your mortgage and other debts are paid off before starting to save – money invested over decades will do much better for you than money invested nearer retirement, as it has time to grow (caveat – there is no guarantee that investments will grow at a greater rate than the interest you pay on debts)
- With interest rates so low, don’t sit on too much money in cash – either pay off your debts or start to invest (caveat – everyone should keep some money in cash as an emergency fund, the amount will depend upon your personal circumstances)
If your debt interest is much lower than your expected investment gains, you could then use the money you have saved or invested, plus any gains, to pay off your debts in a bigger lump sum, rather than small amounts monthly, although this approach does carry more risk than simply paying off debt without investing.
But please, if your debts are unmanageable and you are struggling to meet the basic costs of living as a result of debt repayments, consider seeking advice from the Citizen’s Advice Bureau or Step Change.
For more tips on getting into the savings habit for yourself and your children in midlife and chipping away at those annoying debts, read the guide: