Today I’d like to cover a topic which builds on the last post, Save More Spend Less, which was all about how to save more money on a daily basis. Saving money is obviously a great start if you want to begin building wealth, but it won’t make much sense to hoard cash if it’s being eaten away by outstanding debt. It is important to note that not all debt is bad, and many people have made plenty of money by using loans to their advantage, but that is a discussion for a different day.
Since we’re just learning the basics, and chances are we are not using debt to leverage our investments, let’s consider any debt we have as bad and needing payed off. Before we just start using the money we’ve saved to throw at random debt, it’s a good idea to prioritize by compiling a list. I recommend putting whichever debt has the highest interest expense associated with it, because it is going to be costing you more and more money the longer it is outstanding. A common example of this would be credit card debt, but it will be different for everyone. As you get towards the bottom of your list, you should be adding any low interest debt you have, such as a auto loan. This list will not only help you create a schedule towards being debt-free, but it should also show you how much money you are losing to interest.
The reason we want to pay off debt before we start investing in other things, is because you can save so much more money when you’re not paying interest. When you’re investing, there is usually always risk involved depending on the returns you wish to see. But when you’re paying off high interest debt, you’re practically getting instant returns on your future money with no risk. For example, when you pay down credit card debt which has a 15% interest expense fee, you’re saving yourself from being charged that percentage in the future. This may seem really basic but there are a lot of people who will save money or jump into investing prior to paying off debt, and financially it is almost always the lesser option if you’re trying to make money.
I hope this post was fluid while building upon the premise of saving, and if there’s anything I could do to help with prioritizing debt, reach out to me! I promise as the foundation of personal finance is laid, we will begin to discuss more and more specific strategies in the future. For now, I encourage you to focus on saving more and paying off debt, then we’ll be ready to start investing in no time!