Reduce Debt Increase Wealth

Investing, When to Start with Debt

February 25, 2024 MIsterchuck Season 5 Episode 206
Reduce Debt Increase Wealth
Investing, When to Start with Debt
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Show Notes Transcript

Have a debt problem and wondering if investing should be started. Investing with debt is this a smart idea or should the debt be paid off first. This is the question most people wonder about all the time. This is not using debt to make investments but if a person should invest with a debt problem.

Article Link:
https://www.fidelity.com/learning-center/personal-finance/pay-down-debt-vs-invest 

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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination. Investing, when to start with that have a debt problem and wondering if investing should be started and investing with debt? Is this a smart idea? Or should the debt be paid off? First? This is the question most people wonder about all the time. This is not using debt to make investments. But if a person should invest with a debt problem, again, I'm not talking about making investments by borrowing money to do so. You should never do that, in my opinion. And this is not about doing that. This episode I'm talking about if you have a debt problem, or had a debt problem, your men working to pay off your debt? Should you start investing? If you haven't been investing, when should you start? Or if you have invested? Can you should you continued investing, as you're trying to get out your debt problem? That is the question I'm trying to tackle in this episode. I know there's other financial advisors out there that will tell you to quit investing altogether, and get your debt paid off as soon as possible. Yes, that's a good idea. But I'm gonna say that's not maybe a good idea for everybody, we need to consider everybody's situation, and everybody is in a different boat, per se. Let's say you have a bunch of credit card debt that's at 17 plus percent interest, you have a couple of loan car loans that are eight to 12% interest, and you have a mortgage, that's at three to 6% interest. I'm just giving you some ranges there because everybody's different. And you're struggling payday to payday to meet your obligations. And you've been trying to pay off your debt for a while and you hadn't succeeded. If you've started learning on what to do, and fun following my debt reduction plan, even if this is your first week, you should be doing all those things before you consider making any investments. With there's some exceptions to that. So you need to be paying the minimum payment on all your debt, you need to be putting away money in your emergency savings, and have that minimum of $1,000 plus the need to capture any matching employer retirement savings. If you haven't done that, if you have a 401 K through work, and you hadn't start that even with a debt problem, you do that right away, what are you waiting for, that is money that your employer is giving you. And it's kind of free money because if they're making a match, you should be making a contribution equal to what that match would be. If they're matching 3%, you should be putting in 3% start that way, right away, go ahead and tomorrow, the next day today, get that set up and get that started. And then paying down and paying off your high interest, credit, the things you need to be doing and which if you've been following my debt reduction plan, all my guidelines that tracking the budgeting, the your control center, making the minimum payments, set money aside in your emergency fund, you know, doing a 401 K if you haven't, you got to start that right away. I don't care if you got five credit cards all maxed out and you know $100,000 Because if your employer is matching, that's money that you don't have to put in there, that they're gonna double your whatever you're putting in. And the sooner you start and the longer you do it, the more you're going to have for retirement as a simple fact. And then you're working on paying off all your credit card debt. That is the bare minimum you should be doing no matter what. No matter how much debt you have, know how much you seem to be struggling. He should be doing those things. Let's assume you're self employed and you don't have an employer match. Okay? Well, in that case, unless you have some retirement plan set up, or you're doing something through your work, if you're struggling with a lot of debt, and you have a problem, and your business is not doing that good, well, that's something you shouldn't even be looking at. And if you're already started, maybe just make the minimum you have to make and talk to your tax advisor, whoever helped you set that up. But other than that, you should be everybody should be doing the same thing, whether you're work for the government, whether you're work for a private employer, whether you're self employed, he should be doing whatever you can to make whatever contributions to your retirement plan that you have through work, whether it's your own work your your employers, or your government, whatever that is, you shouldn't be doing that. From day one, as soon as you're eligible to do so, make the minimum payment on all your debt, because that frees up money to help build up your emergency fund. But let's look at other people. Other scenarios to say, if you're young in your 30s, and you have a lot of debt, there's probably a reason that happened, maybe you bought a home, you did some remodeling, you need a furniture, okay, I understand, you know, you borrowed money and you borrow this loan and that loan, and all sudden you're out of control. And maybe you your mortgage is 40% of your gross income. So you kind of overbought the home, you need to get rid of some of those loans, somehow, whether you sell a car, pay it off, if you're able to do that, buy a car where you don't have to borrow money, maybe pay off some of those smaller loans for maybe some furniture loans or student loans kind of work on those, everybody's different. When you're younger, you should be putting something in a retirement plan, whether it's on your own or through work, no matter how big of a debt problem you have. So that is the very basis for everybody. Because the sooner you start, the longer you put in, the more you're gonna have. And it takes a lot less money. If you put money in over 40 years, versus putting money in over 10 years, it's gonna take a lot less money out of your budget to do that, you can go in review and look at what other people say about that. But it's a fact. And then you need to make that part of your budget, and then work on paying off your debt, you got to work on paying off your highest credit card debt first, and pay it down. So as your credit card debt is getting paid off as your loan as whatever debt you have, as key creasing, the amount you're building up in your emergency fund should be increasing. So over time, by the time your debts paid off, you have two months or three months worth of expenses, and your emergency fund. Now if you're saving, so I always say put it in the same bank where you have your checking account. So you can take the money and transfer it real easy. There's got to become a point, as you're paying off debt has gotten, you're going to build it up to three or 4000, you're going to take a chunk out, you're going to apply it to that, you're going to build it back up, you're going to take a chunk out, maybe instead of leaving 1000 in there, you leave 1100 And you pay ply it towards some debt, you build it up again, now you leave 1200. So over time, that's gonna gradually increase and if you leave $100 in there, every time you take money out, to apply it to debt, your emergency fund is gonna get bigger and bigger and bigger. Once that it becomes a minimum of $5,000 You need to look at other places to put that money to earn more interest, your local bank or theory have your checking account, they're not paying nothing. And they're probably not going to be paying anything in the near future. Because they got so much cash that the government forced on them. And all this money bailout stuff that they don't need cash or they're not paying interest. But there's other banks out there that will pay you. There's money market funds that's gonna pay you I'm getting roughly five and a half percent, and five and a half percent is a lot better than a quarter of 1%. So once your emergency fund gets up to a amount that you decide on, let's say it's $5,000. Remember, we're going to still leave 1000 in there. So we're going to take that $4,000 Dollar, that you were making a part of our minimum, and we're gonna find a home for it, that's gonna pay a higher rate of interest. And the first place to look is for high yield savings, and are generally going to be on some type of online bank or a money market, which is still going to be online bank, I've been using them for a few years, now I make great amount of interest, I got a chunk of money poured away, I can transfer money, and it's like almost instant, maybe a day or something overnight. If I do it in the afternoon, the next day, it's in my checking account. And there's nothing to worry about at this time. I'm not sure there is some risk, but there's all of them are FDIC insured. So if they go belly up, at least 250,000 is covered. And he shouldn't have that much in there anyway. So that's your first step. Now, you're still making contributions to your retirement through work, or your retirement through your self employment, or whatever the case is, that still there, we're just taking this money that we're going to use as an emergency fund. And we're going to try to make it grow work for us a little bit more. So that's what you do. And then as you build it back up again, and you're still paying off debt, and then you you know, you do the $100 thing, or $200 thing, because your debt is getting less and less and less. So you're building up faster over time, as your debt comes down, your savings accounts gonna build up faster over time. And once you get an extra 2000 in there, not extra but a 2000. Minimum, take 1000 and put it in that money market keep building that up, so you get more interest. So that's one of the first or second step of what investing you should be doing as your debt is coming down. Now once we get all their credit cards, personal loans, student loans, anything with a, a interest rate above 6%, I have a link in my show note to fidelity. And when to consider their guideline, there's a rule of six percents easy to remember that if you have any debt with 6% or greater, you should be paying that off before you make investments. Now, if you read their article, it depends on how you invest, the younger your are, the more aggressive your investments should be. So then that 6% might become a percent depending on the type of investment, you're doing anything with a percent. But definitely, if you got credit card debt, personal loan debt is definitely on be a high enough rate of interest, he should work on getting rid of it. So use this article by fidelity, to get an idea of a guideline of what you should be doing. It's gonna be different for everybody. If you're older 50 Plus, and you're 1015 years out from retirement, they need to be making those tournament contributions, if he hadn't started, you're really behind the eight ball. And you should be getting that going on your own through an IRA or through your work, whatever the case would be. I'm sure you have reasons why you didn't do it. But the sooner you start, the better off you're gonna be. And if you're 50 Plus and hadn't started your indefinitely retire was a lot less money than were you gonna need. Unless you're planning on dying the day after you retire, you're probably not gonna have enough money to last year, you're living lifetime, unless you make a lot from Social Security or from whatever other pension you may have. I have a government pension and Social Security. But I work much longer than my full retirement year. In order to get that everybody's different. Every situation is different. Now, the younger you are on none, and you got a college education, I'm assuming you have a significant amount of student loan debt. I don't know. We all don't know what the government's gonna do. If you're not making payments on it, you're probably screwed yourself. Because one of the key things through the government that would help you pay off your student loan debt, or to get government assistance or whatever you want to call it is gotta be making monthly timely payments. And if you don't do that, you're getting ripped and you're paying, they're gonna charge you a lot more interest. This make the minimum payment on all your student loan debt and look, wait to see what happened. Get your credit card debt pay down, get your car loans paid out. And now if you only have a home or whatever, or if that student loan debt It is keeping you from buying a home, he got to work on paying it down. Don't wait for the government to say they're gonna apply it and forgive it or whatever the case, because that may never happen in your lifetime. So work towards getting rid of it. Whether you're making the minimum payments or whatever you're doing, or towards getting rid of your student loan debt, that's my personal opinion, you know, they say they're gonna forgive it. But has it happened yet? No. Is it going to happen? Maybe, I don't know, doesn't seem very likely at this time. In fact, nobody's even talking about it. So the older you are, you need to start investing more new retirement and you have to do a larger amount. So it's more important that you get your debt under control a little bit quicker, but you need to do something as far as retirement investing is concerned. And he should have started years ago, been consistent over time. Now, let's say that you had credit card debt, you got your student loans paid off, you got your credit card debt, you got a couple auto loans, you got a line of credit on your home, you got a mortgage on your home. So you still have debt, you still need to build an emergency fund, let's get your emergency fund up and invested in either a money market, or a high yield savings, whichever is paying more interest so that you have a little bit of money working for you. And if something unforeseen would happen unplanned for or unforeseen. What happened you have the money there to take care of it, which is helps you is number one quit using credit as a never ending cycle. Let's say you get your emergency fund built up to four months of your expenses. Now, why so long? Well, if you become unemployed, you need money to pay your expenses. Even if one of you become if you're married, have a spouse or whatever, have one of you coming on employed, you still need the money there to pay your current bills, the pay your current minimum payment on all your debt, to pay your rent, your utilities, your mortgage, whatever the case. So you need enough money there. How long do you think will take you to find another job are you is you're in a career where it's easy to go from job a to job B and maybe take a two weeks vacation in between. Or maybe it's due to a recession and you got laid off. While their session could last one or two years, or you're willing to work another job or a different career or do something different to earn money. And how long is gonna take you to do that might take you six months. And I'm not talking about going back to college again, a different degree, I'm talking about doing something to earn money until you can get a job back in your career career field. And that may take you two months or three months or longer. But if you have money there, at least you're not living off your credit cards from day one. That's the reason why you have an emergency fund. And or in case something breaks or somebody gets injured. Those are the reasons and you're unable to work. You have some money to cover things. Now insurance helps in these cases. But at some time insurance might be three months before you can collect on it. They're not in any hurry to make a payout. So that's for sure. Once you get that debt paid down, you down to maybe just your mortgage, you got your emergency fund up, you've been making the maximum contribution that's max for your retirement plan. Once you got all that and you're doing pretty good, and you got even more money than that. Now you should start putting that in the market. So once you have nine months, take a chunk of money invested in the market. At this point. If you don't have a financial advisor, you probably should look into getting one to help you figure out where to invest in. Do you want to spend all the time figuring out what stock to buy? Or what type of things to buy? Can you buy stocks? Do you buy bonds or mutual funds and EFT Well, what all is all that stuff you don't know anything about it, get a professional to help you and they'll will set you up a plan and there'll be a balanced plan. You can put money in there on a regular basis. they'll invest it for you course all for a fee, but generally not too bad. And you would be on your way to having an investment count your money working for you. That may be taxable, not tax deferred, your retirements tax deferred, but taxable. And maybe your accountant, or your tax preparer, hopefully is a certified public accountant or somebody who is knowledgeable, can help you with should you get a Roth IRA, should you do this to that, you know, you're eligible for all this stuff, because there's rules, rules and rules. And if you're not aware of all the rules and how they affect each other, you can definitely get yourself in trouble. And the penalties are 50% are pretty nasty. So you don't want to do that. You don't want to just give your money to the Uncle Sam, just because you made a mistake by not knowing all the rules and what applies to what, and they changed so much I'm going to talk about, I just know, there's a lot of rules, and you gotta follow him. And if you don't you pay the price. I'll be back in one moment with my final thoughts. If you're interested and learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt, and even tells you how much and when to transfer money into your savings account, and how much and when to transfer money to your debt, and which debts to pay off and order. First. It's not cheap. It's a one time payment. But it will definitely be an investment, something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase wealth@gmail.com. And I'll send you the information about this online software that worked great for me, I have a link in my show notes, the software that I talked about that I use to get out of debt is shop financial.com, copy and paste it and you'll go to the website. If you have any questions about it, once you review that, to send me a notice or a comment or whatever, through that website. And I'll get back with him. Also, in my show notes, I have a link to happy graph.org. It is a spreadsheet that the guy put together to for those of you who don't want to do a monthly budget, but you still need to do your tracking. And if you have some numbers, and you can do a report by category for at least a 30 day period, get a good start, you can use the happy draft software or spreadsheet fill out. And it tells you how much money you have to spend on a weekly basis. But when you fill it out when you do in your debt, when you're making debt payments, make sure he's put the minimum payment in there. And they'll tell you, you have $100 A week that you can spend on gasoline, groceries, entertainment, whatever's left, whatever you're not in there. That's the amount of money you have available. For those items. It works really well. And I recommend Sam link on my show notes. They also have a spreadsheet where you can put in all your credit card debt, I think they've even updated you can put in all your debt. But if you have credit card debt, put that in first and they'll help you figure out how to apply your payments, which ones to pay off it puts it right in front of you. And then makes it a much easier is something you should do anyway. You should know all this information you put in their the name of the company, the due date, when it when the monthly payments, do the minimum payment, the interest rate and your unpaid balance. And they'll track all that for you once you get it in there. So happy draft.org Check it out if you want. They have YouTube videos on how to use their stuff. It's very informative. And if you'd like to make a donation, it's all free. But if you'd like to make a donation, you can do that. It's a nonprofit organization, I believe. I've been working with them from some time I found the third spreadsheet. I used it myself it was really helpful. And they've improved on it since I've used it. So as your debt is coming down and you're paying it off, you should be increasing how much you are investing, how much you're investing for your retirement, how much you're putting aside in your emergency fund. And then eventually once your emergency fund gets a lease for months minimum Long, six months would be better, depending on your risk tolerance. If you are in an industry that has a lot of layoffs for a long period of time, the more the better. If you're in the industry where it's easy to get another job, you don't mind moving across the country to get an another job where you make the same or more money you're renting or whatever the case, you can maybe make that a little bit less, and then put it in the market and start investing. Now you'll see probably out there, whether it's Facebook, YouTube, social media, wherever it is, they're saying, Well, why don't invest in the market, do this instead do that by gold buying, you know, precious metals, real estate, all these things are an option. Do your research before you jump in anything, don't believe any one person, everybody is different. Maybe it's something you don't like to do, you got to consider how easy it is to acquire whatever they're talking about how easy it is to get rid of it. Some things take a longer time, costs more money to get takes longer to get rid of less people buying it at the market drops, how long is it gonna take for it to recover. All these things should be considered before you just jump in and do all this stuff. The market is fairly easy to get in, get out. If the market goes up, you're making you're making capital appreciation, Your investments are going up, you bought more shares at a lower price because a lower price per share, you get more shares. As it goes up, each share is worth more. So as you say, if you sell it when it's up, then you sell less shares. So you have it for a longer period of time. It's all everything is kind of relative to what's going on. Don't jump in the market when it's high, and then pull out when it starts to drop. That's buying high and selling low. You'll never make any money and you'll never do good. constantly put a regular amount in on a regular basis, whether it's monthly, quarterly or whatever, put the money in over a period of time and your costs will average out and then leave it in there when the market drops. Don't panic. Just keep putting money in because the lower drops the more shares you're buying. So when it goes back up, the more value the more money you'll have, the more be worth more because you have more shares. These are all things you cannot ever time the market so don't try to do that. So do it over an average period of time. Do your homework before you do anything. Get professional help if you're not sure what you should do. It never hurts to get a another opinion