If you have high-interest consumer debt, paying it off
should be your first priority. Otherwise, no matter how well you
do on your savings and investments, you're paying too much in
interest expense to ever get ahead.
Say you work hard on your investment portfolio all year and
consistently get a 10% return on your money. That
sounds good. But if you're paying 12%, 18%, or more in
interest expense on your consumer debt, you're still falling
behind every year. And you can't even deduct consumer interest
expense on your tax return.
Does that mean you can't even consider saving and investing
until you're debt-free? Not necessarily.
Why you should start to save and invest
There are several good reasons why you should start to save
and invest now -- even if you're not done cleaning up all those
old credit card balances.
1. Putting money into savings protects you from financial
You can get out of debt without putting money into savings -- but
you probably won't stay there.
If you don't maintain short-term and long-term emergency
funds, the moment you need a major car repair, you'll go back to
using the credit cards. And if some personal hardship comes
along, such as a serious illness or unemployment, you can easily
charge those credit cards back up to the limit in no time.
Don't think of your credit cards as your emergency fund.
They're too expensive. As many people have learned in the last
few years, the bank can cut back your available credit at any
time. And worst of all, you have to pay it back.
Nothing provides a sense of financial security like having
savings and investments you can use in an emergency.
2. Saving money is a learned habit
If you put off starting a savings program, you may put it off too
long. Putting a portion of your income into savings every month
is a habit, like brushing your teeth or exercising. The more you
make it a habit, the easier and more natural it becomes.
Instead of waiting until you are completely debt-free before
you start putting anything into savings, work on paying off your
high-interest debt first. You may be able to transfer some
balances to low-interest or zero-interest accounts. (But watch
out for extra fees before you decide to transfer balances!)
So long as you have high-interest debt, getting rid of it must
be your primary focus. However, putting even $10 or $20
into savings every month can help you maintain a
healthy savings habit.
3. You can practice investing on a small scale
Read all the books and articles you want, but there's nothing
like a few investing successes and failures to teach you about
investing. You'll quickly find out how much risk is too much for
you, and you'll develop your own style of investing.
Buying investments in small quantities is also a great way to
rid yourself of any notion that the stock market is Las Vegas.
The more you invest, the more you learn to ignore hunches and hot
tips and to do your research before you make any moves.
Another great way to practice investing is to paper trade.
Paper trading is simulating stock trades, on paper or
through an online trading simulator, to practice your skills
without risking any actual cash.
By the time you pay off your consumer debts and start
investing serious money, you can be a seasoned investor.
4. Contributing to an employer-matched 401(k) type plan
is too good to pass up
If your employer matches your 401(k) or similar plan
contributions by 50% to 100%, by all means contribute up to the
full match percentage. That's like getting a guaranteed 50%
to 100% return on your money, which even outpaces the high
interest rates on many credit cards.
5. Investing is fun
Investing is exciting, especially if you join a community of
investors and keep up with investing news. It is infinitely
challenging, and yet you can start having small wins right away.
It has all the aspects of a good game, except the rewards -- and
risks -- are real.
If you have high-interest debt, most of your energy must go to
extinguishing it as quickly as possible. But don't let your debt
balances keep you from starting to save and invest on a small
scale in the meantime. If you establish good financial habits
now, including putting money into savings every month, by the
time you get out of debt you'll be ready to start saving and
investing on a much grander scale.
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