Save Money/Pay Down Debt/Invest? - Financial Flexibility #013

I'm a firm believer in doing the math. If you could only choose 2 of these which 2 would you choose? Which one is given the top priority? Is it possible to do all 3 and still live comfortably?

In this article I'll dive into some personal finance decisions I've made regarding debt, investing, and savings. This should help give you some perspective about the best use of your money!

If You Had To Choose 2..

Let's assume you have some student loans debt, a car loan or lease, and rent to pay each month. Call it $30,000 in student loans, $20,000 on the car, and $1500/month in rent. That comes out to an average of $2100/month in expenses.

Let's also assume you make the national average household income, $36,000. This means you're bringing home about $2600/month. You can see where I'm going with this.. what are you going to do with your remaining $500/month?

If you had to choose 2 based on the scenario above you wouldn't know where to begin. You're living paycheck to paycheck and unfortunately, 78% of Americans live this way.

Save Cash

Saving cash without a purpose is the worst decision you can make in personal finance. Cash is worthless sitting in your bank's savings account producing 0.002% APR. That's a sick joke. Seeing 0.02 cents added to your balance each month.. that kills me.

When you save cash without purpose you're actually costing yourself money. The average rate of inflation is 2.4% each year. This means the $1000 in your savings will only have a buying power of $976 at years end! In 5 years that original $1000 will only have $888 of buying power.

You cannot save your way to retirement or wealth. It is physically impossible to combat inflation. Cash that isn't being used or utilized does nothing except lose you money over time.

Debt Repayment

Last month I made the decision to pay off every single dollar of my credit card debt. I had been carrying balances in order to improve my credit score and raise my credit limits. After doing the math (about 100 times), I found that the opportunity cost of carrying debt and investing less per month was hurting my end goals. I wasn't maximizing my money!

Credit cards are the single biggest drug destroying America. 27% APR, $99 late fees, major blemishes on your credit score if you miss a payment, etc... Unfortunately, many young people turn to credit cards to "pay the bills" and fail to pay them off IN FULL each month. This is a slippery slope that leads to an array of issues for you as you get older. Higher interest rates, less likely to be approved for a mortgage or car loan, and revolving balances that continue to compound with interest charged to you.... It's a world of hurt.

If you have debt, I always recommend tackling it first. The absolute freedom and peace of mind you feel watching the balances slowly fade is one of the best feelings in the world. Being debt free is one of the hardest things to accomplish in personal finance. Create a plan, work your plan, and succeed. There are a million online resources that can help!

Investing

Investing in income producing assets is the easiest way to become wealthy and live comfortably in retirement. For hundreds of years people have invested in real estate and seen appreciation that beats inflation. The average rate of return in the stock market is 10%/year, which means your $1000 in savings will be worth $1073 instead of $976 after accounting for inflation! A difference of $97!

Investing is one of the easiest things in the world. It requires little to no effort and you can truly set it and forget it. Buy any amount of $SPY and let it sit for 20+ years. You'll have more money than you originally started with and you're going to beat inflation.

Investing is not a guarantee by any means but it is your ticket to beating inflation, building wealth, and retiring comfortably.

In Conclusion

If you had to choose 2, I would take a step back and re-assess your finances. The number 1 thing you can do is cut your spending. The average individual has $6000+ in credit card debt. This means you're buying more shit than you can afford. Cut the credit card in half with some scissors and pay with your debit card for 1 whole month. I guarantee you'll be more conscious with where your money is going.

Ditch the expensive lease or loan on your car. You don't need a 2018 or newer vehicle. My 2011 gets around fine and probably has another 60,000 miles of life on it. WHO CARES!

Don't be too proud to move back with mom and dad to get your shit under control. 6-8-12-18 months and you'll be out of there with a clean fresh start. If mom and dad say kick rocks then call every single friend you got and get them to be a roommate. Bring that outrages rent down by 50%.

THEN, after all of that is done, you can start paying down your outstanding debts like student loans and credit cards. Get rid of the highest interest rate stuff first, like your ridiculous 27% APR credit card.

ONLY THEN, can you start investing in the market or saving cash for real estate investments. There is absolutely no point in putting money into the stock market if you can't afford to keep it there for 20+ years. See: Capital Gains

It's a tough life man, nothing is easy. Student loan debt continues to cripple the young adult beginning their career and rampant spending continues to climb because "Instagram pics are worth it".

1. Take a long look at your expenses. Cut off every single inch of fat you can.
2. Pay down the highest interest rate debt currently outstanding.
3. Save cash for an emergency fund so you aren't required to go into debt to combat a broken bone or broken down vehicle.
4. Invest in the stock market, bonds, mutual funds, etc. Anything that produces a consistent 8-12% annual return. Do this until your money is making you enough money that you can retire and be at peace knowing you gave it your all.
5. Have some fun along the way, nothing wrong with a vacation or two to reward yourself!