Getting a handle on your financial future is essential if you are going to live the kind of comfortable, secure, and stable life we all deserve.
Most people fully understand the importance of saving their money and investing it smartly, but more and more people are drowning in a flood of debt that makes living that financially free life feel almost unattainable.
If you’ve been working hard to dig yourself out of debt and are looking at investing ASAP deciding between the two can be pretty tough. But that’s why we have put together this quick guide.
Let’s dig a little deeper right now.
Should I Pay Off Debt or Invest My Money?
Anytime you come into a bit of extra cash and want to decide between paying down your debt or setting aside money for an investment there’s going to be a tug-of-war, all kinds of emotions, and creeping indecision.
On the one hand, paying down your debt significantly reduces stress, lowers your overall financial exposure, and helps you to feel more financially stable at the same time.
On the other hand, investing intelligently helps you to build up the kind of cash flow that can transform your financial future – providing a passive income and helping you feel like you are moving forward rather than just resetting your money back to zero.
Navigating the situation is never simple.
Straighten Out Your Immediate Financial Situation
To begin, you’ll want to immediately sort out your financial situation as it exists right now.
There are a couple of things you need to do to sort of “clear the deck” before you make any short or long-term decisions about debt elimination or investing.
Let’s highlight three of the most important right now.
Set Aside $1500
We will dig a little deeper into the value of an emergency fund in just a moment, but you can understand the peace of mind that comes from setting aside enough money to meet a financial emergency. It also allows you the ability to take a few risks and just feel secure in the short-term.
Make Minimum Payments on ALL Accounts
Secondly, you’ll want to make minimum payments on ALL of the accounts you have outstanding to sort of get the ball rolling towards clearing the rest of your debt.
The last thing you want is for your bills to start piling up, those minimums to accelerate because of compound interest and fees, and things to sort of spiral out of control.
Have a Monthly Budget
Lastly, you’ll want to have a monthly budget that you can work off of.
This doesn’t have to be the only budget you ever create or a budget that is poured in concrete, but you need to know where your money is coming from, where it is going out, and what you can do to manage your cash flow more effectively.
How to Build Your Financial Future Intelligently
Now that we have sorted through all of that let’s dig a bit deeper into how to build a smart financial future going forward.
Leverage Any Work Sponsored Retirement Plans
It’s always a good idea to take advantage of any work-sponsored retirement plans—check out this explainer by USAToday—especially if they match your contributions to a retirement investment account, regardless of your debt situation.
The overwhelming majority of employers out there match contributions to 401(k) plans, providing you double your money invested into your financial future. You’d have to be at least a little bit crazy to turn down “free” money like this which is why you’ll want to maximize your contributions ASAP.
Fund Your Emergency Account ASAP
Secondly, you’ll want to fund your emergency account just as quickly as possible.
Every week you should be making regular contributions to your savings account even if it means you can chisel away at debt just yet, at least until you have six months of all your expenses covered in this account.
This financial safety net provides you with the kind of peace of mind, clarity, and certainty that you just aren’t going to have with any other approach. You’ll be a lot more economically resilient, can start making different decisions for yourself when you aren’t living paycheck to paycheck, and generally will be in a much better place to start aggressively working down your debt and investing for your future from here.
Knock Out High-Interest Debt First
After those fundamental basics are taken care of it’s time to go after all of your high-interest debt.
We are talking about credit cards, student loans, car loans, and any other liabilities that you might be carrying with compounding interest that’s only going to hold you back.
It’s up to you whether or not you decide to focus on a single high-interest debt until it’s eliminated open a while making minimum payments on the next one or if you pay a lot more than the minimum on all of your high-interest debts. That’s going to be informed mostly by your financial situation.
This just important that you go after this debt aggressively before you start to move into other investment opportunities than the ones we mentioned earlier.
Move Into Taxable Investments
After your high-interest debt has been taken care of it’s time to start moving into some of your taxable investment opportunities.
This is where you’ll want to start funding taxable investment accounts, where you’re going to want to start looking into dividend reinvestment plans, different mutual funds or index funds, or where you are going to start pumping money into real estate or other income-producing investments.
It’s a good idea to do all of this only after your high-interest debt has been taken care of.
Again, you feel a lot more financial freedom and enjoy a lot more risk tolerance when you’re working from a clean slate of no debt than you would have if you had a mountain of credit card debt piled up while making moves on the stock market.
At the end of the day, you should always be moving to eliminate debt and be investing in your financial future in unparalleled pathways. There’s no rule that you have to tackle one while ignoring the other, though you should have priorities and hierarchies in place to help you get the results you are looking for as quickly as possible.
With the kind of plan that we have outlined above, you should find the process relatively simple, relatively straightforward, and generally pretty easy to navigate.
Clearly, you’ll want to change course and redirect your efforts as your results come tumbling in, either moving more aggressively to knockout debt if it’s piling up or more aggressively investing to capitalize on new opportunities as they present themselves – but this is a good blueprint for your financial future moving forward.
You are the captain of your ship here. The most important thing to take away from this entire guide (and any personal financial information in general, really) is the value of taking total ownership and responsibility for your finances and your financial future.
All the advice in the world isn’t going to amount to much of anything if you don’t take action. You have to do the heavy lifting to get yourself the kind of financial freedom you deserve, and that means being smart, strategic, and deliberate in your decisions with money from here on out.
If that’s your intention and you focus on every dollar, treating it as an asset to build a future most people only dream of, you’ll get the results you want far faster than you ever could have expected!
Disclaimer: This content does not necessarily represent the views of IWB.
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