Should You Invest Now or Pay Off Your Debt First?

So, you have debt. You also hope to retire someday and you want to start investing your money. Both require a commitment. Both require money. Which do you do first, pay off debt or invest?

Good Debt vs. Bad Debt

The first barrier to success in investing is what I like to call, bad debt.

Yes, there’s good debt and bad debt.

Good debt is money you borrow at a low rate of interest, with which you make a high rate of return.

An obvious example is money you borrow to buy an apartment complex. The debt is covered by the rental income – or it will be in a few years.

Bad debt, by contrast, is consumer debt – money you borrow at a high-interest rate to buy things that don’t produce income or grow in value. Things like cars, refrigerators, clothing and trips to Europe.

All of us have done it, and all of us have paid the price.

The Price of Bad Debt

The price of bad debt is the impact of compounding rates of return working against you instead of for you. If you have credit cards or bank loans costing you 18% or more a year, that’s 18% compounding against your retirement.

Rule #1 is all about not losing money, so the first thing most of us must do to become successful Rule #1 investors is to pay off bad debt.

These convenient investing calculators will help you determine if a business is a smart investment.

Don’t Lose Money By Paying Higher Interest Rates

Think about it: If your target rate of return is 15% and we have credit card debt we’re paying 18% on, essentially that means we’re borrowing money at 18% and making only 15% on it.

Even though we’re doing well as an investor, we’re going backward at a rate of 3% compounded per year. That’s a heck of a barrier to successful investing.

The only way you’ll get rich is to hit the lottery.

Otherwise, you’re going broke with great certainty.

But notice that if we turn that around and take the money we were going to invest and instead pay off the 18% interest-rate debt, then instead of losing 3% a year, now, even if we don’t have money left to invest, at least we’re breaking even and we’re not violating Rule #1.

Moral of the story, it’s better to pay off bad debt before you invest. While you pay off bad debt, practice investing using paper trading and when you’re finished paying off debt, then you can start to invest.

As long was you don’t violate Rule #1 and you keep on practicing, learning, and saving, you’re going to be rich one day.

Use My Calculators for Investing Analysis

These convenient investing calculators will help you determine if a business is a smart investment. They will make your research faster and simpler and ensure that all of the numbers meet Rule #1 requirements. Click the button below to get them.

Bottom-Blog-CTA-644x200-px

identicon
Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.
  • Benji Marshall

    As Janet said – great insight, Phil!

    Most people have a tough time differentiating between bad and good debt and just group them both as DEBT. For people who need to crunch the numbers to really identify what the right move is – type them in here and.. voila!

    https://www.clearacctg.com/resources/calculators/cash-flow-calculators/

  • Sir Kelsey

    Hello Mr. and Mrs.

    You are in a financial bind and all your attempts to regain control fall into the water. You have been denied credit because you do not meet the standards of the bank? You dream of owning your own home, but was refused a mortgage because of a lack of credit? Your business has not improved in the past year, need money to grow your business. You’ve had explicable late payments, debt, divorce or loss of a job or other. This is not a situation with no solution, because you might have a second chance to the particular credit. I introduce myself to your request for lenders who are willing to re-evaluate your financial solution. You can avail the loan amount ranging from $ 1000 to $ 50 million our company interest loan rates are 3, 4 and 5% :

    From $ 1,000 to $ 9,000 ( 5% rate )
    From $ 10,000 to $ 90,000 ( 4% rate )
    From $ 100,000 to $ 50,000,000 ( the rate of 3 %)

    All types of financing for a well-defined project If you are in need, do not hesitate to contact us: e- mail: williamlileyfinancialservice@gmail.com

    Waiting for your suggestions.

    Cordially..

  • Yup. Pay off the bad debt. When the interest rate you pay for your debt exceeds the interest you could get for the money you owe, you are upside down.

    Good insight, Phil. Thanks!