Save Money, Invest, Or Pay Down Debt
By special request. A reader asked: “How can I save money to invest while paying down a mortgage and a student loan?”
The question is a good one.
Finance is like a game, you can learn the rules, the strategies, the techniques, and the principles. Those things are all consistent, what is unique is the player. “The Best Answer” is really “The Best Answer For You.”
There’s thousands of articles out there telling you what to do with your money. But there are millions of different situations. You can learn the game by playing lots of hands. You can learn the game by playing and reading personal finance articles. You can learn the game by hiring a professional to look over your shoulder while you play and give you lessons and advice.
Assuming you want to build wealth here what you should do:
Get Your ‘OH SHIT!’ Money
Don’t plan for ‘if’’ things go wrong, plan for ‘when’ things go wrong.
People lose their jobs every day – sometimes even people who are ‘irreplaceable.’ Cars break down, smartphones get smashed, pets get sick, big and small disasters do happen.
Everybody in the finance world, eeeeeeeeverybody in the finance world, should be telling you that you’ll need some emergency money.
The good news is, it’s rare for all of these things to happen all at once. So you can save up one pot of cash that’s available quickly. Like Dan Sullivan says, “If you’ve got the money to solve the problem, you don’t have the problem.”
Three to six months. That’s the standard recommendation, save up enough money to pay down all your bills for three-to-six months. If you lose your job, you won’t miss your car payments or have the lights shut off. If your teeth hurt, you’ll have the cash to fix them. If work-stress is getting to a boiling point, you can take a week to kick back.
Pay Down Bad Debt First
Bad debt is expensive debt. Bad debt is almost always debt you shouldn’t be in.
Bad debt means you borrow money, buy something that loses value, and then pay back the money plus interest.
Scraping together at least a minimal emergency fund is step one. If you’re carrying thousands of dollars of credit card debt or relying on payday loans, paying that off is most definitely step two.
This one is simple math.
If the interest of the debt is high, and most credit cards are, you’re digging your way into the poorhouse.
Emergency Fund Ready, Bad Debt Gone, Now What?
At a minimum, you need to get here. That’s true for everybody no matter what your situation. So back to the original question: “How can I save money to invest while paying down a mortgage and a student loan?”
The “The Best Answer For You” depends a lot on your specific situation. But in broad strokes:
The Financial Wizard Answer: Look at your interest rates. If you’re making your payments and you’ve got some money to play with (invest, pay more mortgage, or pay more student loan), make your choice based on where the biggest impact is. Put your money where the interest rate is highest.
Take the interest rates, and rank them in order of 1-to-3.
If it’s 1) Investment, 2) Student Loan, 3) Mortgage = Put the money in the investment.
If it’s 1) Student Loan, 2) Investment, 3) Mortgage = Put the money in the student loan.
Put your money where it has the biggest impact on your long-term net worth.
The Accountant Answer: You have cash coming in, and you have cash coming out. If it’s positive you’re profiting, and if it’s negative you’re losing. The easiest way for the accountant to increase the bottom line is to reduce the cash coming out.
That means taking a look at your expenses. Do you need that Satellite TV package? Or is Netflix good enough? Do you need that gym membership? Or do you have room for dumbbells in your basement?
If you had a gun to your head and you had to trim down your spending, you could find a place. Every dollar you don’t spend is a dollar that can go towards paying down your debt and investing for your future.
The Salesman Answer: How can you get more money coming in? Can you convince your boss to give you a raise? Can you moonlight, start a business or pick up a side job? Tutor kids in piano? Rent out a bedroom to a college student? Rent out your garage? Can you switch from hobbies that cost you money to hobbies that earn you money?
Whatever combination you decide to try, remember that most things aren’t permanent. Try it for a while and if it works keep doing it. If it doesn’t, try something else. Keep track of the extra cash somewhere and add it up – it will motivate you to make more progress.