One of my biggest pet peeves as a financial planner is debt. Debt is something I deal with on a consistent basis when it comes to my clients. The question that I get the most concerning debt many times is this:
Should I pay off my debt before I start investing?
I’m a huge proponent of paying off all your debts with the exception of your house and maybe a business loan before you actually begin investing and here is why. Most of the time, people are talking about car loans, boat loans, or TV loans. I have even seen loans for washing machines! We are indebted people. Debt sucks plain and simple!! There’s no other way I can put it.
So when you should start investing?
When you look at the amount of interest people pay on credit cards or car loans, it’s just ridiculous. That amount of money could be invested and putting money in your own pocket. Yet you’re paying it out to make someone else’s wallet fatter. With I’ve seen credit cards charge anywhere from 10% to 20%. That’s just mind-boggling to me. That’s more money than the markets could bring in for you.
Most of the time, people are talking about car loans, boat loans or TV loans. I have even seen loans for washing machines! We are indebted people. Debt sucks plain and simple!! There’s no other way I can put it.Click to tweet
I’ve seen business owners end up in $15k, $20k, even as much as $40,000 in credit card debt. It is honestly not a hard predicament to find yourself in if you don’t have a healthy relationship with money. There are business loans out there with owners paying 9% or greater. It is just not beneficial to you to invest when you are carrying debts like this.
Why is it not beneficial to invest when you are carrying a high-interest loan? Well if you’re only making 8%, 9%, or possibly 10%, in your investment accounts while at the same time the interest on your debt is 10%+, you are not coming out ahead. It doesn’t take being a math genius or a financial planner to see that. The math involved is simple. You’ve got to get rid of the debt in order for your investments to make solid net worth increases.
An emergency fund is VITAL to a healthy financial outlook. Life happens! Make the necessary preparations for those moments when the world turns upside down on you. It will happen and if you’re not prepared, then you are going to do one of two things. Either you will turn to credit cards or loans. Or you will dip into your investment accounts, thereby negating any profits you made. One of the most often utilized is 401(k) loan—that’s a HUGE NO-NO! Don’t do it! More on that in a future blog post.
Finally, once all debts are paid off and your emergency fund is in place, then implement a written plan. Don’t just jump in and start investing. Sit down write out how you want to invest your money. Don’t buy into the first stock you see. Seriously, just because your cousins or your brothers are talking about how great a stock is, does not mean it is the right investment for you. Take some time and interview financial advisors, especially if you are a novice to investing. Getting a written plan ensures you know where to put your money, how to get it there, and holds you accountable to decisions you make.
Your written plan will direct you where to put money; whether it is should be a Roth IRA, or a 401K or a solo 401(k) or a SEP or any variation of these investment vehicles. Look to your plan for directions on whether utilizing equities (stocks) are better for you. Are bonds (fixed income) right for you? Having a written plan answers these important questions and much more. A written plan could save you a ton of money when it comes to investing in the long run.
After you accomplish these three goals, then you are ready to invest! At that point start putting back as much money as you possibly can into investment accounts. Once you’re there good luck! Contact me if you need more direction or guidance.