Deciding to pay off debt before investing in real estate.
Every weekday, you get up and go to your job. You settle in to spend the next 8-10 hours of your time to earn a paycheck that seems to disappear almost as quickly as it appeared. You have good credit and have taken advantage of several credit cards, to include their 0% offers. Many times, you find yourself daydreaming about a better life…an easier, carefree life. You dream about investing in real estate because you see it being the answer to all your money problems. But it’s not that simple.
Before you use that credit card again for anything, to include real estate properties, perhaps you should ask yourself if you could instead pay off your existing bad debt first. If you have a decent paying job and make more each month than you need, then you’re in luck. “Need” is important to seriously define.
- You don’t need to go out to eat so often.
- Cook more meals. Even simple ones. Everyone can learn to cook. Make big meals and freeze leftovers. Make food that you enjoy! If you are just addicted to going out to eat, consider having dinner/potluck parties at your house or a friend’s. This brings the fun atmosphere of going out but saves money by actually staying in.
- You don’t need Starbucks every day.
- If you go every day, try only twice a week. Try purchasing Starbucks (or another brand if you’re not loyal) for home use.
- You don’t need to update that ugly carpet flooring in your home.
- I hate my carpet, so I have ripped it up, but until we’re ready to purchase new flooring, I am dressing up the subfloor with a light sanding and stain/paint. Tons of other people have done the same thing in their dining rooms, stairs, and even bedrooms!
- You don’t need purchase more holiday decorations.
- You most likely already have some decorations but always fall in love when you see them at the store. If you don’t, consider garage sales, asking family and friends if they have any they’d like to part with, or make a few decorations yourself!
- You don’t need to spend a ton of money on gifts for loved ones.
- This can be hard especially when you have a family member who consistently gives way too many presents each year. But don’t feel shamed or guilty for not matching up to them. That person most likely just loves gift giving and doesn’t expect the same in return. Have a small amount that you put into your Christmas and birthday savings each month. Shop Groupon and Living Social. Buy gifts early/throughout the year. Make gifts. Homemade gifts and nice family photos often make the most cherished gifts and cost the least.
- You don’t need to take advantage of the new thing you’ve been eyeing because it’s on sale.
- If you’ve gone without it this long, you can extend that time a little longer. Perhaps you will even decide you’re not crazy about it anymore.
Sometimes, we honestly live beyond our means and do need to control our spending. Maybe you love your credit cards and they have a great points system. But those points do you little good if you’re carrying a balance month to month paying daily-compounding interest.
Every day that you stay in debt is another day that you are basically a slave to your job and dependent on that job to keep you from financial disaster. Some might have the mindset of the below cartoon, but I couldn’t disagree more.
Say that for a 15 months, you paid $1500 of your monthly income towards debt. Today, that debt is paid off. You instantly now have $1,500 cash flow each month. I fail to see how that makes you broke. Unless you start increasing your spending again, you will only be building your financial worth and wealth.
But back to the current situation. Do you have a budget? If not, this is something that needs to be tackled. Have a trusted (and smart) friend help you decipher your budget and debt pay-off plan. They are not emotionally attached to this problem and can see things more clearly. Challenge yourself to remove your credit cards from your wallet and only use debit cards until you have zero bad debt. And how should you budget things? Here is a breakdown of a monthly budget you could adopt:
- Mortgage/Rent payment (if taxes, insurance, and any HOA fees are not rolled into your mortgage, you will need to break this out into a monthly payment too even if it’s only paid once a year)
- Water (calculate the average monthly cost since this is typically a quarterly bill)
- Car Note
- Auto insurance
- Pets (food, meds, vet visit estimates)
- Gifts (Holidays, birthdays, weddings, etc)
- Groceries (This does NOT include going out to eat)
- Fun money (This is for going out to eat, toys, and other items you do not need)
- Personal items (toiletries, clothing, towels, sheets, cleaning products, etc)
- Fuel/Car maintenance (estimate how much fuel you buy each month. Look at old CC bills for this info. Then estimate another amount on top of that to add for savings towards future maintenance and repairs such as oil changes, brakes, etc)
- House (This is not mortgage payments. This is savings for house repairs.)
- Emergency fund (You should pay yourself something, even if only $20 per month. This is just a savings account. Except for minimum for matching from your employer to your 401k, I would suggest pausing any investments to IRAs, CDs, and the like.
Add up all these categories. It should, hopefully, be lower than your monthly income. That entire difference needs to go towards your debt each month. If you have some skills using Excel, you could make a spreadsheet so that it does the math for you and you can more easily tweak amounts and see how it affects your budget.
So how do you keep track of these categories so you don’t overspend? You could have separate checking/savings accounts for certain categories. Fun money is its own account with its own debit card. Same for groceries. Same for fuel. Once you spend your monthly allowance on fun money or groceries, for example, you can NOT borrow the money from your other accounts. This could be the difficult part if you’re not used to watching your spending.
Managing debt and budgets can be overwhelming. If you have several credit cards to pay off, that is a lot to remember each month. Make a list of each card. Now log into each account to determine the due date, the APR, and the current balance. Once you have this info, you can determine which card needs to get the highest payment while the rest get the minimum payment. This is similar to Dave Ramsey’s “snowball effect” where he tells you to pay off the smallest balance first. This is to give you a feeling of success and if that helps, do that route! But I personally vote for paying off the highest interest rates first, regardless of balance. Once you pay off the first card, you take that high payment and add it to the minimum payment you’ve been putting towards the next debt in line.
Simplify all this by setting up auto pay for each account. Set the high amount you calculated for the first card on auto pay and then set minimum payment only on auto pay for the rest. Now you will never be late again nor have to remember to pay. The only way you’ll miss a payment is if you deviate from your budget and end up with an overdraft on your checking account.
Being free of bad debt is a huge first step to becoming financially free and also a huge step towards successfully investing in real estate. Becoming free of bad debt will give you so much more cash flow each month that perhaps you’ll even discover that you didn’t want to invest in real estate after all. Perhaps you were just pining after financial freedom. When you have money coming in, but little of it needing to go out, that puts you in a very strong place.
- You can be ready for emergencies.
- You can invest how you want.
- You can travel.
- You can retire early.
Once you’re debt-free, it will be time to adjust your budget to increase your emergency savings account. You could also consider investing in vehicles such as IRAs, CDs, etc again. You could increase your fun money budget. You could start seriously planning to invest in real estate to create even more cash flow.
So, what if you don’t have a well-paying job? Have you stayed for years to be loyal in hopes of a great pay increase? Perhaps it’s time to investigate ways to increase your income.
- Dust off your resume and post it online. Job shop. The best time to find a new job is while you are already employed.
- Consider a 2nd job part-time
- Consider freelance work especially if you have computer, writing, editing, or design skills.
- Analyze your possessions and consider selling them if you are not attached.
- If you have an extra bedroom (or even finished basement) that you don’t use, consider renting it out.
- In our own home, we have increased our income by more than $700 per month renting out a single bedroom. The renter also splits utilities!
- This is a great way to get a feel for landlording.
- The unused space is leaving hundreds of dollars on the table each month.
- You can have a lease that is only month-to-month so that you are not committed to a lengthy amount of time if you decide you’re uncomfortable.
- For even shorter-term rental income, consider putting your extra space up on AirBnB.
Where do you stand with your financial health? Real estate investing can be a road to wealth, but before that, you need to have a handle on your personal spending and debts. Success starts with you!