Invest in YOURSELF and pay off your debt!

The number one question I get from friends is, where can I invest my money. My very first answer to them is - IN YOURSELF!!

First off, if you have any external personal debt, pay it off before trying to SAVE money. External debt would be any debt that you have on personal property (your house is considered an asset - not personal property), any credit card debt, a second mortgage, student loans, etc.

These types of debts are harmful to you and won't help you save any money - mainly because $1 saved in your savings account at 1% interest is worth $1.01 in a year. But if you have $1 of credit card debt at 10% you have to pay -$1.10. That equals a $.09 loss!

EXCEPTION ALERT!!
Of course there is one exception to this rule - that is if your student loans or car loan have an interest rate that is lower than the interest rate at which you can invest (usually the highest risk free interest rate you can get is under 5%). For example: You buy a car and take advantage of the 0% financing (which is not always a great deal - but that is for another blog topic), and you can put your money in your savings account at 1%. You should NEVER pay a penny more per month for that car than you are billed - that 0% is free financing!!!

So why pay off your debt? Because all your debt/credit cards have higher interest rates than you can get back in any straight forward investment opportunity. Credit cards average between 10% and 30% in interest rates. Car loans average between 6% and 12%. Second mortgages average between 6% and 9%. Student loans can even be higher than 6%. These types of debt are expendable! If you pay off your student loans or credit card debt they are gone! Just imagine paying $300 a month in student loans - if you pay them off that is $300 more a month in your pocket (or bank account)!

Car loans and second mortgages are expendable too - sure, you will always want a new car or new house, but not immediately after you pay them off. Think of paying off your car and putting $400 a month in your savings account. You won't want a new car after you see your monthly savings - you'll learn to live with that car for a little bit longer than you would have if you just kept trading it in for the next model and never getting out of car loan debt!

Let me give you an example of how paying your normal monthly payments is hurting you. On your typical car loan of $20,000 at 5% (which is a low rate) for 5 years - your average payment per month would be would be $377.44. When you mail your first payment in, $83.33 is for interest. That means you are paying 22% of your first payment to the bank and you get nothing for it. Over those 5 years you would have paid $20,000 for the car and an additional $2,645 in interest! That works out to paying over 13% more for that car - and your interest rate was only 5%!

So how do you use your money better? If you invest more money into yourself - and put a little more money towards that car every month - you can knock months off that car payment. Want an example? Ok. By paying $20 more a month on that same car, you can knock 3 months off the 60 month payoff timeline. If you paid $50 extra a month, you'd knock off more than 7 months. If you paid $100 more a month you'd knock off 13 months. That means you'd pay that car off in less than 4 years! That means that you'd be saving $477.34 a month for 13 months = $6,205 if you continued those payments into a bank account for that 5th year!

There are a couple other non-monetary reasons why you want to be debt free.

1. Less stress - the relief you get from paying off a loan is priceless. Remember that first time you paid off your credit card? Yup, multiply that by 100 when you pay off your student loans.
2. Better credit scores. This might not be important to you now, but when you go to qualify for a mortgage you will qualify more easily (less stress), qualify for more money (less stress) and get a better interest rate (smaller monthly payments! and less stress). .5% additional interest rate on a 5% $100,000 mortgage over 30 years = $31 more a month X 360 months = $11,148 more in interest! (ok, that example was monetary!)

What do you do if you have multiple credit cards, student loans, or car loans? Consolidation is always a good idea - especially if you can do it at a lower interest rate. But be very careful - because lots of times credit card companies charge you to transfer balances off other cards - these fees can range from $100 to 5% of the total! Beware of those fees.

Always pay off the highest rates first. Credit cards are always higher rates - those need to go first. But remember, you have to stop spending money on those cards to make the balance go down! Also, pay those credit cards off as soon as you can - minimum payments on credit cards are 100% interest and NO balance.

So, should you make extra payments on your house too?? The answer would always be yes, but only if you can afford it. If you make 1 extra mortgage payment a year on a standard 30 year mortgage you can pay off that house 5+ years sooner. Making large payments is not always easy though - so I would have to say that paying extra on your home should come after everything else is paid off. Why make extra house payments? Because real estate has truly been (in most parts of the country) one of the safest investments you can make. Also, you shouldn't look at your house as an investment until you sell it. It is a necessity and you need a place to live. Paying off more of your house gives you more equity in your home, which means you end up with more money in your pocket (for a bigger house or a yacht) when you sell it! That is always good!

Many people think that instead of paying off their debt, they can invest their money at higher rates than they are borrowing it at. That is called GAMBLING! And remember, investing is not gambling. If you feel that you can make more money by investing than you can putting the money into an account that earns 6% or so, that too is called GAMBLING! If you need to gamble then you have to be willing to lose big time - if you lose big time you will still have that debt and a lot less money to pay that debt. Gambling is a quick fix that has more risk than reward - remember, the house wins more than 50% of the time - you might as well flip a coin.

I will discuss investing strategies in a future blog.

So, to summarize - invest in yourself by paying off that debt! Get rid of those high interest rates by paying off higher interest rates first and get rid of those expendable loans. Invest in yourself and soon you'll have money to invest in money making opportunities! Good luck!