Stepping Stones to Investing: Debt

Tina Haapala |

By Gary Silverman, CFP®

We’re taking a walk through my new book, Real World Investing. What steps do you need to take before you start investing?  Last week we touched on savings. Saving money means keeping it safe until you are ready to or you need to use it. This week we’ll look at the opposite of saving—debt.

Debt is a cash-flow killer. While it may make things easier at first, you are essentially borrowing tomorrow’s income today…at interest. (And let’s face it, the banks charge a lot more interest when you are using their money than when you are loaning them yours.) To pay them back, you’ll then have to spend less in the future to make up the difference. If you thought things were bad now, pushing your problems into the future is not a good answer. Sometimes it is necessary, but it should be the exception rather than the rule.

A good way to look at debt is to think of it as savings, but in reverse. When you save, you put money aside, maybe earn a little interest, and then you buy what you want. With debt, you buy what you want now, end up paying a lot of interest, and then you “save” the money by paying down your debt. That’s why keeping up your standard of living now by creating debt will lower your standard of living in the future.

Using debt is also presumptive. At least if you spend today’s money today you know that you have it to spend. If you spend tomorrow’s money today, you are assuming that the money will be there tomorrow. Sometimes it is, and sometimes it isn’t.

Imagine your road to investing as a real-life number line. With numbers, before you can go positive you need to get out of the negative. So your first steps on your journey are to get your debt to a manageable point. Manageable means you have enough set aside to pay off your debt or you have enough guaranteed income to make your debt payments. Even if you have a great job with a great future, the Financial Crisis showed that many sure things weren’t all that sure.

What I’ve been talking about mostly applies to things like car loans and credit cards. And while a house is more of an investment, if you borrow to afford it (and most of us do) then the same applies. You’ll want to either have money in your other investments to be able to pay off the house loan, or enough income to make your debt payments without straining your budget or ignoring other parts of your savings program.

Note the words “without straining your budget.” If a house payment just barely fits into your budget then most any hiccup in your cash flow is going to cause you immediate problems.

Next stepping stone on the path to investing is managing risk. We’ll tackle that next week.

A version of this article was published in the Wichita Falls Times Record News on December 11, 2016.