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I recently got married and my new husband and I seem to be spending most of our income just trying to pay off our debt. We have stock investments that are about equal in value to our debt, and I'm wondering: Would we be better off just selling our stocks and repaying our debt, or should we leave our stock investments alone and continue to pay our debt down?
-- Lindsay, Minneapolis, Minn.
One could easily argue that you would be better off selling your stocks and paying off your debt.
After all, you would be earning what amounts to a guaranteed return equal to the interest rate you're now paying on your loans compared with the uncertain returns of stocks. And you would be wiping the slate clean on your borrowing, thus allowing you to invest the money you had been devoting to loan payments.
On the other hand, by selling off your stock investments you would be incurring taxes on whatever gains you have in those investments (assuming you have gains), and you would wipe out savings that could come in handy should you or your husband be laid off or run into unforeseen expenses.
There's no one answer
I don't think either line of reasoning is necessarily more valid than the other, which is to say I don't believe there's a single "correct" answer to the situation you describe.
That said, however, I can tell you that if I were in your situation, I would be much more apt to leave my stock investments intact and focus instead on paying down my debt as quickly as possible. Here's why:
It usually takes people many years to accumulate a financial cushion of the sort you and your husband have invested in stocks. If you wipe it out virtually overnight by paying off your debts all at once, it could be years before you accumulate a decent size cushion again. And there's always the danger that you may never rebuild that nest egg.
So my feeling is that once you've managed to put some assets aside, you should do all you can to keep that money growing and avoid dipping into it unless you have no other choice.
A more painful choice
But you do have another choice. You can hold on to the savings you have and, instead, devote as much as your income as possible to repaying your debt.
Granted, this process can be painful. But in a way that pain is a positive thing. It reminds you that borrowing is not something you should do lightly. It reinforces the notion that piling on debt can box you in, reduce your financial options.
Most of all it teaches you from actual experience that getting out of debt is a lot more difficult than getting in, which is a valuable lesson to learn. And, hopefully, after going through a period where you have to devote much of your resources to paying off lenders, you will me much less likely to get in over your head again.
I doubt that paying down the debt by simply selling other assets would have quite the same impact -- or act as the same sort of deterrent against taking on too much debt in the future.
Two pieces of advice
So I have two pieces of advice for you and your husband. The first is to make debt repayment your number one financial priority. Set a target date for becoming debt free, and then devote as much of your budget as you can to this goal.
To estimate how long it will take to get out from under your debt load, click here. Most of all discipline yourself to go through with your plan. Don't wimp out.
Once you've paid off your borrowings, you should be left with a good sized chunk of money each month that formerly went to debt service that can now be used for other things.
This is where my second piece of advice comes in. You'll no doubt have the temptation to splurge a bit after going through a disciplined period of belt-tightening. And, by all means, you should feel free to reward yourself a little.
But don't overdo it. You should think of this post-debt period as an ideal chance to create some real financial security for yourself. The way to do that is to take some of that monthly cash flow you previously devoted to paying off debt and invest it, perhaps taking advantage of the automatic investing option offered by most mutual fund companies whereby a certain amount is automatically transferred from your checking account into a fund account each month.
One final thing: you mention that you and your husband have "stock investments." While I believe stocks should be the core of any long-term investing plan, I also think it's important that people own some bonds or bond funds to temper the ups and downs of the stock market, and to give you a bit of a hedge against the possibility that stocks aren't the stellar long-term performers in the future that they've proven to be in the past.
For suggestions on how to build a diversified portfolio of stocks and bonds, click here. After all, the last thing you want is to go to all the trouble of getting out of debt only to see your investment stash done in by a lack of diversification.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."