From debt to investing
The downward slide
In the beginning there was debt. A lot of debt…and then…some more debt on top of that. Credit card debt – pizzas, tvs, holidays, restaurants, gifts – how could anyone afford all those things in large quantities without using their credit card to finance it all? Eventually there was a line of credit which was used to pay off the credit cards along with that shiny new car and furniture for the house. Good thing the credit cards were paid off because they were necessary to pay for extra gas for the new car and new paint to match the new furniture. You said you wouldn’t use the credit cards anymore but somehow they got maxed out again.
I see the light!
“Financial epiphany”, “hitting rock bottom”, “turning the corner” – call it what you will, but at some point you realize that you have to start spending less than you earn and get your finances organized.
Start clawing your way back
The hardest part of debt reduction is not starting it – but rather to continue to do it until all your debts are paid off. There are times when you start backsliding and it will take everything you have to get back on track. This part is just plain hard – even boring if you will. Cutting spending is no fun, selling possessions sucks and doing without things or services you are used to is just plain hard.
At some point there are still debts to be paid but you start feeling better about your finances – bankruptcy is not the real possibility it was before, your debts are much smaller, your spending is reined in. This is one of the hardest positions to be in when paying off debts. It is very easy to start buying things and getting off track “because you can afford it now”. One of the positive aspects to this phase is the ability to start investing for retirement if you choose. While there is absolutely nothing wrong with paying off all your debts in entirety before investing – there is also nothing wrong with starting to invest when you still have debts.
Victory is mine!
Congratulations – you have paid off all your debts! It has been a huge struggle but you did it! Take a minute and pat yourself on the back and then GET BACK TO WORK! Don’t buy yourself something nice, don’t go on a vacation as a reward – just keep going. Your finances are a lot better than they used to be but you are only half way to the goal of financial independence.
Investing your money
Now you become an investor – this might happen while you are still paying off debts or once you become debt free. Either way it has to happen sooner or later. Unless you have a pretty good pension through work then you need to have investments to help pay your expenses in retirement.
Learn about investing
The most important part of investing in knowledge – it doesn’t matter if you do your own investments or hire a financial advisor to run your investment, it is absolutely critical that you know what is going on. You don’t need to know every detail about every company that you own in your mutual funds but you do need to learn the basics of investing. What kind of fees are your mutual funds charging? What kind of accounts do you have (ie 401(k) plan, Roth IRA etc)? Are they taxable or not? Do you know what your asset allocation is? Do you know what asset allocation means?
But I have an adviser I trust? Why do I want to learn about investing?
Financial advisors are in business to make money for themselves – not you. Of course they want you to do well so that they can keep making money off you but their profit comes first! I’m not suggesting you shouldn’t use an advisor but rather to learn as much as you can so that when you deal with your advisor, you know what is going on.