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Firstly, thank you everyone for your prayers, patience, and understanding as we navigated the death of my father in June. It was a beautiful time to spend with family as we remembered the life and love of Jerry Martinek.
Secondly, I am focusing on debt repayment for this month's newsletter. Let's say you owe $50K and you happen to have $50K in the bank. Should you pay off the debt? That depends on the interest rate: how expensive is it to finance the debt? Many people turn to the total amount paid in interest as their guide, but most of that interest is overly-inflated with future value dollars.
Instead, use a time value of money (TVM) calculation on the future payments to determine what the net present value (NPV) is as a better guide of assessing the expense of financing the debt. I regularly run this calculation for my clients.
In short, the real cost to debt depends on the inflation rate which is an unknown variable. Given the latest interest rates, I consider debt with less than a 5% interest rate to be relatively inexpensive. Anything less than 3% is down right cheap! Debt in excess of 5% should be paid off in earnest.
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- Read: This is something that is not often considered, but is truly the right way to analyze what debt you may have: the time value of money (or TVM). Read more here from Investopedia.
- Read: This article from Financial Mentor provides a deeper understanding on net present value (or NPV), as well as an NPV calculator.
- Watch: While this brief video from Harvard Business Review focuses on the net present value (NPV) for investments, the same principle can be applied for debt repayment.
You can click on the links below to access this month's resources. Thanks for reading, listening, and watching!