Sunday, 16 June 2019

Investing While In Debt - What You Need To Know

Investing While In Debt - What You Need To Know

Should you be investing while you are in debt and there is no black and white answer here but I want you to look at four different things you should consider if you were thinking about investing

Any debt that is about 5% 6% 7% I will advise you to pay off right away before investing too much money.

If you are carrying credit card debt anything that double digits you want to pay that off almost immediately, get rid of that almost before you start investing 

You Should Pay Off Your Debt

Let's start off with some of the pros of paying off your debt, what are some of the benefits of focusing on the debt first and getting rid of it and then moving on to investing or other types of various asset allocations that you want to deal with in the future

  • The reason for paying off debt first there is a really big reason for this and that is the feeling of freedom, a feeling of liberation when you finally don't owe anybody anything at all.

I know personally when you carry a lot of debt especially like credit card debt or maybe car loans it's definitely this feeling of sort of drowning in a sense of suffocating when you have these monthly bills coming in month after month and you are owing interest on that and it's definitely not a good feeling we can agree on that

  • Paying off your debt first you are going to get to that $0 mark where you don't owe anybody anything and it's a really good feeling 

There is another benefit for paying off your debt first and the reason for that is because it's more predictable, what I mean by this is you know that maybe your interest rate is 6% and you know 6% annually for the next 36 months 

You know that if you pay $2,000 a month for the next 36 months you know where you are going to be, financially, whereas if you are investing you don't necessarily know where those investments are going to be next year, that is a benefit of paying off your debt first

It is a little bit more predictable than investing 

The Downside Of Paying Off Your Debt

There are some downsides though to focusing so much on paying your debts that you are not really thinking about investing you are just paying off the mortgage and the student loan, the car loans, credit card bills, and the downside of that is sometimes you can get so wrapped up in that 

  • You blink and all of a sudden you are 45 or 50 years old and you haven't even started investing, you only have retirement account set up because you are just paying off your mortgage and your student loans and all kinds of different debts you have build up over the past 30 years of your life or whatever, and that could be a serious issue.

Start Investing

You probably want to set up something, there is a happy medium in between these two and you want to do something personally, I would take advantage of my 401k plan, if your employer offers some type of retirement plan definitely take advantage of that or some type of stock ownership plan where they're matching your contribution

That is something you probably want to consider even while carrying some level of debt, so I think setting up retirement accounts almost regardless of how much debt you have is important at least in part important you don't have to put tons of money into those retirement accounts if you are carrying large amounts of debt

But I think it is important to just get the ball rolling with investments

Stupid Mistake People Make About Investing And Paying Off Debt

There's really some benefit to focusing a lot on investing over paying off your debt, and one of the biggest benefits for doing that is this possibility of essentially making more money with your investments than you're paying with your debt

  • What I mean by this is, the goal here for most people is that they would take their earnings from their investments and pay off their debt with the earnings from their investments

You've to be really careful with this because you don't want to put yourself in a position where you're planning on paying off your debt with your investments earning because the problem that can occur here is that sometimes there is going to be external factor that affects your investments and even the most intelligent investors of all time Warren Buffet, Carlie Munger, Benjamin Graham

They have losing times, they have months where they lose, they have years where they lose and just about everybody in 2008 going into 2009 a lot of people lost money, and so you could be an amazing investor, you could be a genius, but there is still going to be external factors that can affect you and your investments

Sometimes people don't always make the best decisions and sometimes there's thing that is out of your control that is going to negatively affect your investment portfolio and the problem can occur when your investment starts going down, an investment account starts decreasing maybe it drops 10% to 20% in a matter of a couple months maybe we hit a recession or something else happens to the company that was unforeseen

Your investment account was down and your debt is still pilling up because you are so focused on paying into your investment account that you haven't focused on your debt at all

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