What do I do first? Pay debt, save money, or invest?

6 Replies

Hello! I am a total noobie here. I just started listening to the Bigger Pockets Money Podcast and I am intrigued by this idea of financial independence! I am ready to take a real look at my spending and reduce my monthly costs. My question is this- what do I do first with the money that I save from cutting my expenses? My current situation is this: I have been living paycheck to paycheck my whole life (so has my parter). I am in my early 40s. I started an IRA 2 years ago and that has about 12k in it. That is the extent of my savings. I do not own anything. I have no investments. I have 22k in tax debt and about 70 in student loans. My partner has about 50k in student loans. I have the opportunity to work more (I am self employed) and also to cut expenses. I could probably come up with at least $1000 a month, maybe more by doing this. What should I do with the money first? I have been looking to consult with someone on this but I am not even sure who to ask. I was wondering if I should make an appointment with someone at a bank?

Thanks in advance for your help!

@Lindsay Ferlin I see this is your first post so welcome to BP.

Part of the answer depends on you and your commitment and discipline. 

First I would build up some cash reserves for emergencies. Put it i a separate account and forget it is there. Then I would start paying off debt.  Keep in mind that paying off debt at 10% has the same affect on your net worth as earning 10% on your money. If you tax debt is IRS then you are paying about 9% between both the interest and the penalty. 

When you are behind the ball as you are, Dave Ramsey is a good guy to follow. He is the best when it  comes to getting out of debt. Once you are out of debt, I don't think Dave is the best for growing your investments.

Thanks for this advice Ned! I ordered Dave's book and I am in the process of cutting expenses and adding more work. I feel energized around getting this debt paid off! Question about this forum- is there a way to delete my original post? I realized after posting that I was feeling a bit exposed! Thanks. 

Living pay check to pay check for as long as you have will be a difficult habit to break. Living that way is a choice based on immediate gratification...very difficult to give up. To test your resolve save up a emergency fund and see if you can function without touching it for anything but emergencies.

First step is eliminate all negative debt. Begin with the debt with the highest interest. While doing that work on improving your credit score.

Once your debt is cleared start saving for the future. To assist you should find a financial advisor. Someone in a investment company outside of a bank is best. They will have the most varied options for you to consider, banks only sell their products.

Hi Thomas, 

It will be a difficult habit to break indeed! But I feel like listening to the Bigger Pockets Money podcast has been a wake up call for me. I have known for while now that I need to pay debt, save money etc but I feel like I am holding that information differently now. It is clear that I actually need to give things up! I know this is obvious for a lot of people but it is a new way of thinking for me. I hope to get my partner on board for this project- it will be easier to make better choices if we do it together. I grew up in a family where my parents lived beyond their means. They never taught me about money. They taught me to value material things. I know this needs to change and I hope I can stick with it. 

Being as you've been living above your means for the past 40 years, it's going to be a very difficult battle. You need to make sure your partner is on the same page as you or he/she will just be bringing you down. It's not going to be fun or easy. Set goals and stick to them, reassess these goals monthly to verify you are on track. Don't give up and good luck.