While some will say we are finally coming out of the recession, there is plenty of individuals knee-deep in debt that would beg to differ. They continue to struggle to meet their monthly bills and see credit debt continue to mount.
A very common question today is if it better to simply sell off current assets to pay off debt?
For many people, their debt payments are what are putting them under. If they merely had their mortgage and household bills, they could get by.
However, when they add in numerous credit card and loan payments, suddenly their monthly income is no longer able to cover their monthly bills.
When deciding to sell off assets, you have to look at both the short and long term benefits
There is also a difference between financial assets and physical assets. For instance, perhaps you have a memorabilia collection that is extremely valuable. You could sell the entire collection and become debt-free. Will that collection increase significantly in value over the next few years? Does that increase in value outweigh the interest from your debt?
Physical assets such as the example above are fairly cut and dry. For many people, it is more about the actual attachment to these assets rather than the thought of making a profit. However, we are seeing people go to even more drastic measures of selling off their home and extra car to pay off and eliminate debt.
What are you to do when your assets are tied to your future financial security, such as IRA’s?
This is where things get extremely complicated. For instance, if someone is liquidating investments to pay down their home loan, are they able to actually pay the loan off? If they are paying off debt, are they able to completely eliminate the payment? If not, what good is liquidating the asset going to do because there will still be a payment to be made?
On the other hand, if you owe £50,000 on your home and £10,000 in credit card debt, and have enough assets to pay off these debts, in today’s market, it is probably worth liquidating. The one consideration here is if there are significant fees in cashing out the account early. If these penalties do not outweigh the monetary benefits of eliminating this debt, the decision is a fairly simple one to make.
Where most people will run into difficulty is in cashing out their retirement fund
If they are still young enough, they will have time to rebuild that fund and do so debt-free. In addition, they now have a home in which they have 100 percent equity. Even though they have no cash assets, the physical asset of the home could be more valuable, especially when the real estate market bounces back.
Selling off assets is never an easy decision, but the alternatives today are much worse. Some individuals do not even have that option and find themselves in their 40s, literally with nothing in their pockets.
As difficult as it may be, selling off assets may be the most prudent choice to protect your future. However, every situation is different. You should first sit down with your financial advisor to weigh the pros and cons before making a significant decision such as this.