There’s a lot of advice out there for ways to manage your debt. One of the most common pieces of advice is that if you have extra money, pay it towards the balance of your biggest loan. But is this true anymore?
In the world of finance, your money goal should be to earn more than inflation. Let me explain with an example.
Let’s say you put $1000 under your mattress on January 1, 2011. On January 1, 2013 the original value of $1000 decreased to $954.19. That’s right, Mr. Inflation snuck into your room during the night and stole over $45 from you!
So now let’s say you have an extra $500 each month that you want to pay towards your mortgage. You could do that, and not save yourself any more than the rate of inflation (because it’s the same as your VA interest rate.) Or you could listen to my advice and invest it. It is generally accepted that even the worst financial advisor should be able to get you at least 5% return.
Right now VA loans are closing with interest rates that are floating around the standard rate of inflation. Put simply, you can easily earn more money investing than you would save if you paid extra money towards a low interest VA loan.
On a side note, the expert advice of paying off your loans quickly is still valid for your higher interest loans, especially from consumer debt like credit cards.