Debt is an interesting tool.
In general debt is bad for you. Debt is mathematically a negative bond. If you own bonds, you should probably sell all of those before taking on debt. All of that said, there are sometimes good deals on debt and occasionally debt isn't a terrible deal.
The math behind debt is pretty easy, for $X of principal, you are charged Y% interest(per year) until all of $X(the principal) is paid off.
Debt is a good deal if you can basically risk-free make more than Y% interest on $X principal. That's not an easy thing to achieve, but it does happen on occasion.
Some situations where debt can make sense:
If the rent/buy for a house works out to a buy and you can find a good interest rate and you are not over-buying your house, then a mortgage makes sense.
Education, assuming it's in a field that will let you pay it back in a reasonable amount of time. I.e. debt for a degree in napping probably won't work out well for you. i.e. I'm speaking from a debt perspective ONLY. i.e. the math does not work out to take on debt for a degree that has a VERY low chance of even letting you pay off the debt, let alone earn a premium on that debt. This is a bad mathematical bet. I.e. the chances of a degree in "napping" letting you earn a premium on that education is low to none, so taking on debt for no expected return is a bad deal, mathematically speaking). If you still want a degree in napping, the math says, don't take on debt to do it. But otherwise enjoy all the napping! There is a calculator to help you figure that out.
True Emergencies(i.e. needing to put actual food in your actual tummy) Debt to buy Coffee is a terrible idea.
0% interest car loans (assuming you aren't buying more car than you can afford, and you already have a good deal on the purchase price).
When and how should you pay back debt.
tldr; for 2020 -> 2030: I'd suggest anything over 4% debt interest one should aggressively pay it back, above 2% interest it's debatable, perhaps split and invest 50% and pay off 50%. Below 2%, it's a pretty easy case to keep the debt and invest.
The math is actually surprisingly easy. There is also an emotional component, if you emotionally prefer not having debt, then just pay it off aggressively, the math doesn't matter. Onto the math!
When your expected returns exceed the cost of the debt, you should continue investing into your expected returns and pay the minimum on your debt. As soon as that changes, and your debt costs you more than your expected(or actual) returns, you need to then start aggressively paying down your debt.
How do I calculate expected returns? Let's say a TSM fund of 6% real happy path - debt = expected return.
TSM 6% - 6.1% interest = -.1% expected return. Answer: pay off debt.
TSM 6% - 2.5% interest = 3.5% expected return. Answer: invest.
Of course, time then gets in the way. Let's say your debt @ minimum payment is due to pay off in 20 years, then you can likely expect 6% real returns over that 20 years, and the above numbers make sense.
If however, your debt is due to be paid off in the next 5 or 10 years.. Suddenly expecting 6% is maybe not the wisest course of action. We have no idea what the markets WILL return, but all the experts are expecting low returns over the next decade.
Also, I assumed one was invested 100% in TSM. If you are invested in equities and bonds, then suddenly the answer might change. a 50/50 portfolio over the next decade is not expected to return 6% even in the happy path.
So I'd venture you lower your expected returns some and keep them on the lower end, since debt interest is guaranteed, expected returns are not.
Collections handling
Occasionally even the best of us lose track of a debt and it gets sent to collections.
First, it's probably wise to make sure the debt really is yours, mistakes happen. You can ask for verification.
Once you have determined it really is your debt, then you have 2 options:
Pay it in full immediately.
Haggle for a discount. Here is one take:
Here Are the Percentages to Be Familiar With Before Negotiating
- 30% of your debt: Start by offering this amount. It's low, which leaves room to negotiate.
- 40% - 50% of your debt: This is the amount a debt collector will often accept, as experts say.
- 80%: A debt collector will often begin negotiations by asking you to pay 80% of your total debt, forgiving only 20%. According to several experts, paying any amount above 50% is too high. If you agree to this amount, you are not getting the best deal.
Just make sure you are negotiating for resolving of the debt completely. Personally I think they are over-stating their case a little. It's my understanding that most debt collectors pay about 50% of the total debt when taking it over, so to hassle for a 50% off seems a bit much. If one could reliably get a 50% discount what's to stop someone from abusing this, and just letting all debt go to collections, negotiate a 50% cut and pay it off immediately. That's not sustainable.
Personally I've only had a few encounters on debt I wasn't immediately aware of. I verify it, and then ask for a discount if I pay in full right now. They usually give me some % off and I'm good. I don't want to haggle for the best possible deal, but I'm happy to take a discount if they will offer one.
I'll just add one more thing, don't dilly dally with collections, they won't appreciate it and you won't appreciate it, if they get tired of waiting and ding your credit. So deal with it promptly.