Step 1: No Debt

CreditCards

     Step 1 of Investing: Don’t have any debt. In all seriousness there is no way that you can compete with a credit card.

     It took me twelve years before I realized how important it is to be debt free. Twelve years of being an adult that is. Everyone knows that debt is a bad thing from as soon as you understand the concept and yet so many of us are carrying balances for one reason or another. Mr. Ferret is no different. Several years ago he traded in his perfectly functioning vehicle, that was only 5 years old (and gray now that I think about it) and upgraded to a vehicle one and a half times as expensive (and just as gray) that gets worse mileage than the original. But I bought it off the showroom floor and wasn’t that a feeling! Well now I have another, buyer’s remorse. Don’t get me wrong, my new vehicle is awesome but I could have done so much more with the money that I have had to pay for not that much of an upgrade. If I really needed the upgrade I could have bought used and saved several thousand dollars. I didn’t and now I’ve been paying for it and will continue to.

     Let me be really clear for a second. There is a lot of advice out on the interwebs about investing and retirement. I spend what is probably way too much time reading it. I *hate* when I’m reading and the author goes from “invest wisely” to “don’t spend any money”. Frugal is fine but I’m not going to tell you to throw away your TV, skip showers to save on water, or turn your air conditioning off when it is 100F in the middle of summer. Personally I really enjoy the modern style of life that we have, it just needs some tweaks so we can get the most out of it. Getting out from underneath of debt is the first one.

     Now that I have that out of the way, let’s talk numbers. According to this statistic I just made up (Nah, it is from the NY Post circa 2014) the average interest rate on credit cards is over 20% annually. Let’s be conservative and underestimate that, we’ll say it is actually 10% annually as I have cards both over and under 20%. Even then it is a crazy high number. For each $1,000 you have in there you will owe $100 straight to the credit card company each year. At $10,000 you owe a full $1,000. See where this is headed? Stock market investors would love to get a guaranteed 10% gain every year. Forbes.com lists year on year stock market performance of the S&P 500 to average around 7.5%. There is very little chance that an individual investor will beat 10% a year. With numbers like that the credit cards win every time and chances are very high that your credit cards have rates much higher than 10%.

     Once that is done we move on to what I call “medium term debt” like car notes, personal loans, and student loans. At one time I thought these types of debts where things that people just lived with. Almost everyone I know is paying for one or more of these and they typically have interest rates below 10%. Theoretically you could beat those interest rates through investing so why pay it off first? Without the obligations to pay these medium term debts you become fiscally flexible. If “something happens” (and it always does) the money that may have been going to a car note is instead available to cover that “something”. You can hold off investing to cover these occurrences where if you have $50,000 in debt you are already paying on, it may take just one more thing to push you over your budget and into racking up debt each month.

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