I’ve talked a lot about investing on this site. This is both because this is where a lot of my focus is in my own life (that and my final boss character), but also because it’s where I think we all can get the most incredible value for our efforts.
Or rather lack of effort. After all, there are very few places where you can put in a small amount of money in over a long period of time, and let it just sit there, and then come away with a much larger sum.
(Some would say that real estate would fall into this category, but in my opinion it doesn’t pay off until you scale. Feel free to comment if you disagree.)
So you might think that I’m going to recommend everyone start investing right now. Actually, that’s not true.
But if it’s such a good deal, why not? Because you may not be ready.
Table of Contents
Debt first, investment later
Let’s start here: If you have debt, you’re not ready to start investing.
I know I’m going to get pushback on this, so let me defend myself.
One common objection is: “My debts have really low interest rates. Doesn’t it make more sense to pay the minimums on the low interest rates debts and use that extra money to invest.”
I call this “trying to be smarter than reality“. No, it doesn’t make sense. First of all, the spread in interest rates isn’t significant enough. Even assuming you have 4% debts and 12% investments, the debt is likely to be a guaranteed rate, but the investment is never guaranteed. So next year you might have a 4% debt and a -5% investment. Are you feeling lucky?
Investing is for the long term. So you could make 8-12% in investments over the long term. But do you really want to keep your debts for the long term? Well, here’s why you wouldn’t:
There’s risk associated with debts (secured debts, specifically) that are never shared by investments. If you find you are unable to pay your car loan, you’re going to have much bigger problems than if you find you are unable to invest for a month. Because of this, it makes sense to prioritize eliminating your debts over any investment, to minimize the time in which you have them.
For this reason, I don’t even recommend getting too much into investing unless you have an emergency fund in place. Again, if you are unable to pay your car loan, that’s precisely when you want an emergency fund. Your investments won’t help you there.
There are two exceptions to the above rule of paying off debts first.
Exception #1: If you have a job where your employer offers a “company match” investment, take it. A company match when an employer, in order to induce employees to invest, will put in a similar or equal amount of company money to your account. Do this.
While this will take money and time away from paying off your debts, you are in effect making an instant guaranteed 100% return on your investment. Compare that to the theoretical maximum 12% over time you could net from investing, and it feels clear to me that the upside outweighs the downside.
Exception #2: Mortgage debt is excepted. Mortgage debt is different mainly because of the vast difference in sums involved. Debts tend to be in the five-figure range, while mortgage debt is almost always six figures, or one order of magnitude larger. If you had to wait until your mortgage was all paid off, you would miss the ability to take best advantage of compound interest.
(Do you have over $100,000 in non-mortgage debts? Good heavens, I hope not, but if you do, you could consider this Exception #2b.)
Plan today to start later
There are so many benefits to investing, don’t you want to start today? Yes! You want to start as soon as possible.
All the more reason to double down on eliminating your debts as soon as possible. And it is possible. I did it, although it took years. Time to get on a plan. Get rid of negative money. And then you’ll be ready.
As a final thought, you might think that this post is ill-timed, as the markets around the globe have been doing their best impression of a crashing airliner recently. But I love it when markets tank, and you will be better off if you don’t pay attention to the news. Remember when the world ended after the financial crisis in 2008-2009? Right, neither do I.
But enough about me. Are you ready to invest? If not, what are you doing to get ready?