A common question when someone is trying to get out of debt is how they should balance this goal with the idea of saving and investing for the future. They say something like, “Barry, I really want to be out of debt, but I also really want to be able to have a good retirement.” My response, even though it sounds a little sarcastic is this: who doesn’t want to be out of debt and who doesn’t want to have a good retirement!? So how do you balance those goals, because you and I both know there is only so much money to go around each month.
Let me just hit this one head on. What is important to you RIGHT NOW? Do you really want to be out of debt and on your way to total financial freedom? If so, then your best “investment” while you’re in debt is to put all your efforts into getting out of debt. I don’t care if you’re at retirement age or not. If you have debt, focusing your energies on getting out of debt is the best way to invest your money. PERIOD. Whether you’re past the magic age of 65 or not, becoming debt free still dramatically reduces your monthly income needs because without debt, you don’t have debt payments! Without debt payments, you are much less restricted on what you must do with your income. Think about it with me for a bit. If you have a credit card debt of $10,000 at an interest rate of 21% (which is pretty standard; it is even higher for many cards), then you’re losing $2,100 per year just to have that debt out there. I know that oversimplifies the math, but it makes my point – if you had your choice of paying off that $10,000 this year or investing $10,000 in the stock market, which would you choose? This is not a trick question! You know you’d be “earning” 21% by paying off that credit card. Who knows what you’d get in the stock market. I’ll take a guaranteed 21% return over the unknowns of the stock market any day of the week.
When you are in debt and have made the commitment to working your way out, paying off your debt is by far the wisest investment you can make. Be methodical, disciplined and consistent. Set goals of paying off your debt within a reasonable time frame (a budget is key here), then use every available dollar that you can scrape together to make it happen. This is the power of focus. Don’t try to muddy the waters by putting 5% into this savings account, another 5% in that savings account, then another 5% in retirement, leaving “whatever extra I can come up with” toward paying off your debt. While that is the approach of a lot of people, that only tells me you aren’t serious about getting out of debt.
When you are out of debt, you can get really serious about investing for retirement, for a bigger home, a nicer car or any other thing that can wait a few years. So what’s the process to this type of focus? First, let’s assume you have a small emergency fund in place (at least the amount of a single paycheck). This will keep you from being dependent on credit if anything goes wrong. From there:
- Cut Expenses – Stop spending any unnecessary money, including investment for retirement and other long-term plans (remember, this is TEMPORARY).
- Maximize Income – Do extra projects on the side, take on extra assignments at work, etc. Get some extra money coming in to boost your ability to pay off debt.
- Get current on everything – if you are past due on any debts, you’re spending a LOT of unnecessary money each month in late fees and other penalties.
- Use Dave Ramsey’s debt snowball method to arrange your debts.
- Make a call every time you’re ready to pay something off. If you make a call to your creditors when you’re ready to pay that last payment and ask them to waive a month’s worth of interest or some other fee, you’ll often save some money. At worst, you made one last phone call to the company to bid them farewell.
When you follow these five steps, you’ll be earning prime returns on your “investment” as you have less and less debt. Focus your intensity and get to it!
*This post is linked at Frugal Days Sustainable Ways at Frugally Sustainable.