Pay off debt first before investing?

7 Replies

Hello BP!!

This is my first post. I've become interested in real estate after talking with a friend about how to get more cash flow. I've been reading many posts and listening to podcasts daily on BP. My goal is to work no more than 40 hours/week at my normal job and still be able to provide for my young family. My normal job brings in $58K. My wife does not work and we have a good amount of "stupid" debt (credit cards/hospital bills/student loans) and
very much in savings and fair credit. I'm an electrician by trade and a military veteran. I'm interested in buying and flipping and maybe even owning a couple rentals in the near future.

My main question is should I pay off my debt before
looking into investing? Thanks in advance!

Travis

I would pay enough debt down in order to raise your credit score so you can qualify for the best financing options. Then I might look to decide whether to jump into an investment or pay off more debt. The debt does nothing for you but if some of it is cheap debt you may want to hold onto that and not let it stand in your way. Get rid of the high interested stuff so you can put your money to work for you. Don't be in a rush to jump into REI for cashflow because things don't always work out was wonderful as we plan them. Make sure you are on solid ground before you take a stab.

@Travis Billings it depends on what the debt is.  If we are talking credit cards - yes! If it's a mortgage or student loan under 5%, not necessarily. My default answer is always debut but really its a case by case decision.  What is the interest rate on the debt/s and how much do you owe? 

@Travis Billings I would focus on the most expensive debt first and that is usually credit cards.

Loaners seems to be less concerned with college debt and it's usually a low interest.

I thought I was ready to invest because my scores were decent and I had a few thousand to invest. Then I realized I was forfeiting over over $300 a month in interest charges. I call that hustling backward or reverse investing.

Now my credit card debt is gone. My credit score shot up and I'm currently rebuilding the cash to invest.

There's no rush if you went this long without investing. But I do know that the debt is bigger daily and that's no Bueno. Hope this helps

@Travis Billings I would take a multi pronged approach.

First I would make a list of all of your monthly expenses and debts and figure out what you have left over (if anything).  Try to reduce or eliminate household expenses that are not necessary.

Second, I would focus on consolidating high interest debt maybe to a 0% balance transfer card.  This is instant return to your family and if you eliminate 18% interest on a credit card, that is a hard return to match with the amount of effort it takes.

Third, I would make sure you have an emergency fund so that you can pay for any unplanned expenses that arise.

You can focus on the highest interest rate debt first, which makes the most mathematical sense, or you can eliminate the smallest debt first for a feeling of accomplishment (Dave Ramsey method).

Also, I am a firm believer that you cannot cut your way to prosperity.  Try to generate additional revenue through sidework or working extra hours and plow that money toward a combination of debt and additional savings.

Finally, don't let an abundance of debt and lack of a boatload of cash discourage you.  Look for others to partner with on deals.  

I myself was an active duty Marine from 1991-1997 and Nationguardsman from 2000-2004.  If I can be of any further assistance, don't hesitate to contact me.  Personal finance can seem daunting, but it is just math.

Ed

@Travis Billings First off, thank you for your service. Fellow veteran here. In regards to your credit card debt, would it be safe to assume it carries the highest interest rate out of all of your other debts? I would consider doing a credit card balance transfer to a credit card that is offering 0% APR.

I am in the process of transferring ~9k in CC debt from my Navy Federal CC (13%) to a Citi CC with 0% APR on balance transfer for 21 months at a 3% fee (~$200). Doing so would allow my monthly payments to go towards the principal vice interest therefore paying it off faster.

Something to consider!

My advice to anyone thinking of starting to invest is to pay off all bad debt first. Anyone without the discipline to eliminate bad debt will never survive in investing. Investing  requires more discipline and money knowledge than they have or likely will ever have if they live on/with credit debt.

Credit debt is a sure sign they do not understand money and will be over their heads with investing.