I got a call from my broker on Tuesday wondering why I wasn’t investing as heavily as I was in the past.
I explained that I was more focused on eliminating debt as quickly as possible and not very concerned with investing at this time. I mentioned that I’m following the principles of Dave Ramsey and at this stage, because I have some student loan debt, I’m supposed to eliminate that debt first and then build up a massive emergency fund. He understood that, and said he’s all for eliminating debt.
Believe me, it is very difficult not to invest when you’ve been successful at it in the past. Any of you out there going through the same temptations?
I’ve come to understand that there’s a time to invest, and then there’s a time to save. Investing always incurs risk, while saving money kills risk. The question we must ask ourselves is when is the right time to take on that risk. If you don’t have a solid emergency fund in place (3-6 months of expenses), you probably shouldn’t take on the risk of investing.
Let’s look at an example of why it is so important to eliminate debt before investing:
- Let’s say you have $5,000 in the bank and $5,000 in credit card debt (at 10% interest). You have been offered an investment that might yield 12% return for your money. You can either take your $5,000 in savings and invest it to possibly get 12% return on your money, or you could pay off your credit card debt. In summary, you can either have a guaranteed savings of 10% of your money or a possible 12% return. What we’re really talking about here is an extra 2% return with risk or nothing extra with no risk. I think I rather be guaranteed at 10% than at risk with 12% of losing it all.
An emergency fund is also necessary before investing. Why? It gives you piece of mind while you invest and provides a shield against the obstacles life throws your way.
One of the arguments I’ve heard is that it is a great time to invest because the stock market is so low, so you’re almost guaranteed a return if you invest now. One of the important points they’re missing is that a person must be ready to invest given their own life circumstances. Timing is everything. A person should not invest their grocery money away. BAD IDEA!
There is a time and a season for everything. In my life, investing is not what I need to focus on at this time. How about you? Where are you at? Do you have a stellar emergency fund and extra money to invest? Or, do you need to focus on eliminating some debt and building up your cash?
Don’t get me wrong. I think investing is one of the best things people can do with their money. But it needs to be at the right time. I highly recommend doing a little brainstorming on the importance of timing your financial life. You need a game plan. Have one yet?
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My opinion is, that unless you have unconsolidated student loans with variable interest rates, it would probably be better to just pay the minimum. My student loans are consolidated at a low fixed interest rate of 3%. Shifting my savings to paying off my loan would seem to bear a very high opportunity and investment cost.
Credit card debt though, is an entirely different matter I suppose.