As the next economic generation is earning a good income, they’re exploring options for financial opportunities and considering how to increase their wealth. One of the best and most basic financial investment principles is having options with a versatile investment portfolio. There are several financial opportunities and strategies depending on your goals.
One wise financial decision is to accelerate your debt payments to help you get out of debt faster and stress over high-interest debt. This can be applied to any debt including credit cards, student, auto, or home.
You should consider aggressively paying down debt depending on how many debt payments, whether it’s enough to avoid penalties, and paying enough to reduce the principal amount each month. Once you pay off existing debt, you can start working towards using those finances for investing.
One common financial goal is building a retirement fund and an emergency fund. A retirement fund is great for the future, but an emergency fund can help provide a financial safety net for the closer forthcoming future. An emergency fund should be able to pay for 6 months of necessities in case you lose your income or if you face any other financial emergency.
What is your investment portfolio like? Are you seeing a financial advisor? You may want to contribute greater amounts of monthly savings so that your investment portfolio augments at a faster rate. You can then reach your desired portfolio size before even retiring.
Why should you prefer debt payment over boosting investments? That’s because with sizable debt, whatever money your investment portfolio generates will be eaten up by compound interest.
A simple calculation should be enough to show that with large debt and high interest, your investment earnings cannot exceed your interest costs. That is, if you make the mistake of investing when you have a sizable debt to pay off, you could enter into a substantial net loss.
A simple example can help you better understand the situation. The average credit card interest rate is around 20 percent. Trust us when we say that even Warren Buffet does not know of a long-term investment that offers a higher percentage return. Hypothetically, what happens when you pay $100 towards stocks (which return, say 8 percent) rather than your credit card debt of 20% interest?
Had you paid this $100 towards credit card debt, you would not have incurred $20 by the year-end. So even though you make $8 on your stock investment, you suffer a net loss of $20 – $8 = $12 on this investment. Investing while letting your credit card interest balloon is a losing game.
It is always better to first focus on expedited debt payments before endeavoring to boost your investment portfolio or retirement fund. Once your debts are clear, you can go about boosting payments towards your retirement fund so that you have a steady source of bountiful income before you retire.
The main takeaway is you should prioritize debt payments before moving on to investments. It doesn’t take long for debts to pile up, so we hope this offers you some insight!
