After staving off the bank run in “Its A Wonderful Life,” George Bailey kisses the two remaining dollars, puts them to bed in a basket and tells them to have lots of babies! Unfortunately, most people treat investing just as wishfully. For most of them, Investing 101 is a two-lesson course which must be completed before moving to the Investing 201 training being offered by others on this topic.
LESSON ONE: STOP LOSING MONEY! – Right now, today, before anything else, you must decide to stop losing money! Until you succeed at that discipline, do not invest a DIME in ANYTHING. DECIDE to develop a positive cash flow with the goal of saving at least 10% of your income.
I recently consulted with a young lady making about $3500/month. Unfortunately, she was spending almost $3900/month funded by credit cards. In this, she is not unusual. She is remarkable in that she DECIDED to cut off access to credit cards, reduce her spending (by canceling her cable TV, accepting a minimal service, pay-as-you-go cell phone and eliminating fast food meals), and increase her income with a second job. Those decisions were tough and few have her resolve. Today she celebrates a monthly savings deposit of almost $400 into a growing account with dinner at a nice restaurant and a movie with some friends.
LESSON TWO: ELIMINATE DEBT! – Consumer debt is a black hole and many people never intend to repay it. Not only is that often illegal, it is always unethical. Even when the repayment of debt is not required by law (e.g. following a bankruptcy), it is required by conscience. Real debt freedom comes with real debt retirement.
To start eliminating debt, first refer to Lesson One especially the part about credit cards.
Next, evaluate your real indebtedness. For most, it revolves around credit cards and car loans and double digit interest rates. Sell the car to pay most of that debt and determine never again to buy a vehicle you can’t pay cash for. Over a 20-year period, the cheapest way to drive vehicles is to drive and repair cars that are 7-10 years old when purchased and keep driving them until the die. You may have to swallow some pride but you can smile all the way to the bank!
With regard to consumer credit debts, focus and attack! Make minimum payments on other debts while concentrating all resources on one until it is paid off. Then repeat the process until each is retired. Start with the smallest debt and work up so you can be encouraged by the progress. You will be surprised at how quickly this can be accomplished and how much your financial position will improve in short order. It is possible that a debt consolidation loan may prove helpful in lowering interest costs but the costs of fees to secure the loan often make this option less desirable than a simple repayment attack strategy.
Finally, consider aggressively re-paying your mortgage, if you have one. There is an adage that it is better to invest than repay. This is true if the return on the investment surpasses the cost of the mortgage. However, it takes a 32% return on a $25,000 investment to offset the cost of an 8%, $100,000 mortgage. In my experience, most people should concentrate on repaying the mortgage. Secure the best possible 30-year fixed rate mortgage you can get. Then find out what the monthly payments would be on a 15-year mortgage and pay that amount. Make to sure to tell the mortgage company to apply the excess payment to the loan principal. Even if you are cannot pay all of the difference between a 15-year and 30-year mortgages, using a principal-reducing strategy will dramatically shorten how long it takes to repay a mortgage.
If you learn these two lessons: Stop Losing Money, and Eliminate Debt, sooner than you think, you will have real money to use for Investing 201.