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Yes, there is such a thing as paying off too much debt—here’s what you should know

CNBC Select spoke with three financial advisors about what to consider when becoming debt-free.

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Being debt-free is a financial milestone we often hear about people striving for. Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances.

Paying off all your debt, however, doesn't always make sense. It depends on the type of debt you have, interest rates offered, investment returns, your age and, ultimately, what your bigger financial goals are.

It's therefore confusing and sometimes hard to know exactly how to manage debt in both the short- and long-term.

"[It] can feel like walking a tightrope — balancing the benefits of eliminating debt as quickly as possible while keeping an eye on cash flow," Joe Lum, a California-based CFP and wealth advisor at Intersect Capital, tells CNBC Select.

For example, you might be spending too much on debt payoff each month if there's not enough wiggle room in your budget for things like an emergency fund or meeting your company's 401(k) match. But on the other hand, not allocating enough money on debt payoff means you could be prolonging the amount of time you're stuck paying interest.

To get a better idea of what to consider when paying off your debt, we spoke with a few financial advisors. Below is their advice.

Look at the type of debt you have and its interest rate

Certain types of debt have lower or higher interest rates than others. For example, student loans and mortgages tend to charge much lower interest rates than the double-digit rate you likely pay on a credit card balance.

Lum calls paying off high-interest credit card balances a "no-brainer," but argues that you should consider paying other low-interest debt over time to take advantage of the cheap financing.

Danielle Harrison, a Missouri-based CFP at Harrison Financial Planning, agrees: "The higher the interest rate on the debt, the easier the decision," she says.

Factor in possible investment returns

If you have low-interest debt, such as a mortgage, consider what you could otherwise earn by putting more money in the stock market versus toward paying your debt off faster.

Given mortgage rates are near all-time lows right now, excess cash may be better off invested than accelerating debt payments, Lum argues, because you are likely able to earn more by investing than you pay to borrow.

"It is harder to justify paying [your mortgage] down aggressively if the alternative is that you would have it invested in a diversified way that could bring in annual returns of 8%," Harrison says. (This 8% estimate is roughly in line with what the market has historically averaged.)

Paying down debt too fast comes with an opportunity cost, argues Kelly Welch, a Pennsylvania-based CFP and wealth advisor at Girard, a Univest Wealth division: "Let your money work for you," she says. "The lower the interest rate, the more comfortable you can be holding the debt, paying your required [minimum] payments and investing extra cash you have."

What if you don't want to invest?

Not everyone is inclined to invest in the market, and that's OK. It may feel too risky, or you may not have the time or interest in learning how. "If this is the case, it is better to pay off debt aggressively than to take no action at all," Harrison says.

When you eventually have all your debt paid off, seek advice from a financial planner that can make you feel more at ease with what to do with your extra cash. Read more about when you should hire a financial planner.

Consider your age

"The younger you are, the more time you have on your side for compound interest to perform its magic," Harrison says. Younger adults are therefore better off putting extra money toward savings/investing versus accelerating low-interest debt payoff.

With a high-yield savings account like Marcus by Goldman Sachs High Yield Online Savings, interest on your savings is compounded daily — meaning what you earn can add up substantially over time. High-yield accounts probably won't out-earn interest rates on debt, but starting a small nest egg in your early twenties can be a worthwhile goal if it will give you a longer-term safety net.

Younger adults may also want to consider putting any extra funds in their retirement accounts for long-term growth. "A typical 30-year-old with a mortgage at 2.5% should really be focusing on trying to put as much away in tax-advantaged accounts as possible," Harrison says.

Such accounts might include tax-deferred 401(k)s and/or IRAs, tax-exempt Roth accounts or a health savings account (HSA), to name a few.

For older adults nearing retirement, however, paying off all your debt should be higher priority. Harrison suggests putting more toward paying off your debt as you age. Doing so will help your overall cash flow since your funds won't have as much time in the market as someone in their 20s, 30s or 40s.

Consider your bigger financial values

Financial experts agree that you should generally invest your extra cash rather than accelerate paying off low-interest debt, but still some people place immeasurable value on being debt-free or owning a debt-free home.

"While there are plenty of mathematical reasons why [investing extra cash] might make sense, the reality is that personal finance is much more art than science," Lum says. "Paying off a mortgage can be a milestone achievement, so if being debt-free is a part of your long-term plan, then in certain circumstances that could outweigh the opportunity cost of investing the difference."

A mortgage is a large, daunting piece of debt and for many, completely paying one off signals a huge sense of accomplishment and a form of long-term security. A mortgage can be a financial burden that, once taken care of, opens people up to different opportunities. Perhaps you'll feel more free to spend your extra cash or take bigger career risks knowing you don't have this large lingering debt that you owe.

It's ultimately up to you to decide what is most important to have: a debt-free lifestyle or one in which you routinely leverage debt as a strategic part of your financial plan.

Most importantly, make sure that whatever debt you do borrow is part of a plan, and create your budget while keeping your particular goals and motivations in mind.

"If you can go to sleep better at night or have a sense of accomplishment because you are debt-free, that can have an amazing effect on other areas in your life," Harrison says. "It isn't all about the numbers."

Information about Marcus by Goldman Sachs High Yield Online Savings has been collected independently by Select and has not been reviewed or provided by the banks prior to publication. Goldman Sachs Bank USA is a Member FDIC.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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