Most of my articles focus on personal finance, on investing and growing earnings. These concepts are frequently applied inside a vacuum, regardless of what’s happening on the other side of the balance sheet. While optimising earnings and beating the marketplace may be is desirable, how about debt consolidation and debt reduction?
Otimpising your finances when you are in debt
It’s pretty common that I have the occasional chat with a mate or colleague about investment opportunities and while they are passionate about Apple stock or surviving the crash of 2019, within the same breath, they mention the high interest on credit card debt or car credit loan they are carrying. It’s none of my business at all, and so I don’t get carried away in giving my two pennies worth, but among us mates … I question why the main focus is not on lowering your debt load first, before trying out retail trading. Granted, when snagging a 401(k) complement the match limit is excellent. But beyond that, funds could most likely be used more effectively, right?
Consider that many retail traders won’t ever beat the marketplace consistently (professional money managers can’t). Next, you will face taxes and commissions. Finally, even when you “meet” historic market returns, you are most likely speaking 8-9% returns, dividends incorporated. Now, consider that P/E ratios are very well across the historic norm, therefore the expectation that market returns may even achieve the lengthy-run average are optimistic at best.
Contrast that with a 21% rate of interest on credit cards, 12% on car loans, or whatever other high interest debt are available. The equation appears completely uneven. I’d target the debt! But more occasions these days, everyone’s a trader and everyone’s in debt! I’d practically concentrate on getting rid of the higher interest debt or consolidate debt as a reward to start investing if it is that desirable!
Besides the financial impact on the given time period, there is the tangential advantage of enhanced credit ratings too. Getting a good credit score has saved us 1000′s in interest obligations over time through getting the very best mortgage and car loan rates.
So, while growing earnings later in life is really a noble goal, trying to do this buried underneath high interest debt may be counterproductive, even dangerous, as the credit remains stagnant and you are having to pay out a lot more than you are generating on investments. Debt consolidation reduction might earn the finest return on investment within the grand plan of things.