Pay Off Debt or Invest For the Future?

Pay Off Debt or Invest For the Future?

Often people ask me whether they should pay off all debts before saving for the future or save first in hopes of earning a higher return on investments than they are paying in interest on debts. This is an age-old debate, and I have heard convincing arguments from Financial Advisors on both sides. The “Pay Off Debt” Argument Some advisors recommend that we liquidate all of our savings and investments except a very small amount, even as low as $1,000, to immediately pay down as much debt as possible. Then they recommend that we use every discretionary penny from each paycheck to eliminate the remaining debts as quickly as possible. After we are completely debt-free, then we can start saving and investing for the future. I admire people who are disciplined enough to follow this extremely aggressive strategy, but it is risky because it does not leave an adequate safety cushion. A $1,000 savings account would not be enough to cover unemployment, major unexpected expenses, or serious extended illness. What would happen to my house if I could not make my mortgage payment for six months due to unemployment? Would the bank cut me any slack because I had been paying them extra for the past year in hopes of paying my mortgage off sooner? Not likely. We should always maintain at least three to six months of living expenses in liquid savings, even if we have debt. The “Invest it All” Argument On the other extreme, some people recommend borrowing as much as the banks will allow and investing it all because they declare we can make more...
Where Should We Put Our Money?

Where Should We Put Our Money?

Although the amount we save is likely to have a bigger impact on our well-being than how we invest our money, we still need to invest it wisely. Choosing among the myriad of savings and investment options available can be overwhelming. How can we know where is the best place to put our money? Here’s some perspective from an investment advisor. Everybody Wants to “Help” You Invest. Countless financial institutions are constantly clamoring for us to park a piece of our pie with them. Why? That is how they make money. Unless we bury our money in the backyard, someone is going to make money off of our money no matter where we park it, even if it merely sits in a bank account. This is not a problem as long as we receive the benefits we expect in return. In order to be sure that the financial institutions meet our objectives and not just their own, we must be clear about what we are trying to accomplish with each dollar we deposit. My motto for savings and investment advice is “safety before speed.” Would you buy a car that can go from zero to sixty miles per hour in less than three seconds if it were not also equipped with excellent brakes, seat belts, and air bags? The potential rate of acceleration is much less important than the ability to avoid or minimize the impact of a crash. Without the safety elements, you may never reach your destination, no matter how fast you can go. Money works the same way. Many people lose the opportunity to be financially...
How to Start Saving for Retirement (or Any Financial Goal)

How to Start Saving for Retirement (or Any Financial Goal)

Slow and Steady Wins the Race Often when I meet with people who are learning good financial principles for the first time, they are anxious to get started and want to do everything perfectly right away. I am glad for their enthusiasm, but this approach may not be sustainable. I would not normally recommend that people immediately start saving 20% of their income if they are only accustomed to saving 5%. That would be like trying to run a full marathon if they had never run more than six miles at a time. Marathon trainers recommend starting with a much shorter distance than the full 26.2 miles, then adding no more than 10% to the training distance each week. Otherwise, trainees could injure themselves and lose months of progress. Likewise, too big of a sudden increase in savings could cause “financial injuries” such as increased credit card debt, marriage tension, or spending binges. We may even become so frustrated that we stop saving completely. Of course any level of savings requires some sacrifice, but starting with a realistic amount that does not hurt too much is more healthy and sustainable. Then we can gradually increase it over time. How to Get Started Saving Those who are not saving anything at all right now might even want to try starting with only 1-2% of income. Most people are surprised how little they feel the difference when they increase their savings by modest amounts. Then gradually building from there is easier. Just remember that whatever amount we decide to save now, in the future we are likely to wish we had saved...
How Much Should We Save?

How Much Should We Save?

The best way to calculate the proper amount to save is as a flat percentage of current income. I believe we all must consistently save at least 20% of our gross income if we ever want to get ahead financially and retire comfortably someday. Everyone I have ever met who is financially independent, meaning that they have enough money to live a comfortable lifestyle without having to work, has consistently saved a significant portion of their income, many of them more than 20%. No other reliable way to accomplish this exists, except perhaps by means of an employer or government pension that guarantees payment of a significant portion of pre-retirement income for life. Still, most people I have met who are successfully living on pension income also regularly saved a large percentage of their income throughout their careers. Keep in mind that many pensions are facing severe financial difficulty, so even if we are entitled to a pension, we would be wise to save a substantial amount of our income in case it does not pay out as expected. Ancient Wisdom for Saving Consider a famous example in the Bible from thousands of years ago which illustrates the wisdom of saving at least 20% of our income. Joseph, the son of Israel who was sold by his brothers as a slave and then taken to Egypt, was the only man able to interpret Pharaoh’s troubling dreams. Joseph perceived that the dreams were actually warnings from God that there would be seven years of plenty followed by seven years of famine. Joseph counseled Pharaoh to save a fifth part (20%)...