Wondering if you should pay off debt or invest your money first,
a lot of people have this question, so that's what today's video is all about.
I am Tiffany Thomas with Wealthy Tiffany Dotcom.
And I achieved financial freedom at age thirty eight.
So if you are looking to achieve financial freedom at a young age as well,
hit that like button and hit the subscribe button and we're going to dove right in.
There's a few things you want to know before deciding whether or not to put
extra money toward debt or toward investing.
And one of those things is do you have an emergency fund?
This is really important because if you
don't have an emergency fund, then your debt will continue to grow
because there's going to be emergencies that come up.
So the first thing you want to do is make sure you have your emergency fund.
And a lot of people recommend having three to six months worth of expenses for your
emergency fund, just sitting in a savings account.
But I kind of look at that a different way.
I like to keep the lowest amount possible
in my emergency fund because that money is not actually working for me.
So I did a video for you about how
to decide how much your emergency fund should be.
And I will leave a link above and below
and the description and you can check that out after this video is over.
But you'll want to make sure that you have
your emergency fund set up, because if you do have an emergency,
maybe you have a health emergency and you need to pay your health deductible and you
don't have that amount, then you may swipe that credit card
and pay for your deductible with your credit card.
And that just adds to your debt that you have.
That's why you want to make sure you have an emergency fund.
And like I said, it can be a pretty small emergency fund,
but you need to have something in savings so that you don't continue to accrue debt.
Once you have your emergency fund set up,
then we can decide whether to pay down our debt or invest our money.
And just as a side note,
make sure to keep your emergency fund in a high interest savings account.
I personally use Ally, ALLY for my emergency fund.
They have a pretty good interest rate
and you will definitely find a higher interest rate for savings accounts
with online banks rather than brick and mortar banks.
So definitely keep your money somewhere
where it can earn at least a little bit of interest.
All right, now let's decide what we should do
with that extra money that we have, pay down our debt or invest it.
The first thing that you're going to want to do is to make a list of all of your
debts. You can just put it into a spreadsheet or even a Google sheet.
I love using Google Sheets for all of my information,
but just make a list of each of your debts, what they are and how much it is,
and then make sure to include the interest rate for each of your debts.
And once you have all of them listed out,
you're going to want to rank them starting with the highest interest rate debt
and then go to the next highest interest rate and then the next highest and so on.
And this is going to help you decide
whether to pay off your debts first or invest first, because once you know
the interest rate for each of your debts, then you can decide, OK, well,
can I make more money investing or will I save money by paying off my debts?
And what's been useful for me to track all of my debts and even just track my whole
financial situation is to use personal capital.
It's a free app that links all of your financial accounts.
Your checking, your savings, your 401K, your credit cards,
mortgage, everything you can think of, it hooks all of them into personal capital.
And that way you can check on your
finances in just one place within about a minute.
So it makes it really easy to see how much debt you have left to pay off and it will
even show you the interest rates on your debts.
So it's super handy.
If you are interested, I will leave a referral link below
in the description and you can use that to get a free 20 dollar gift card
to Amazon when you hook one of your retirement accounts to personal capital.
Over the past 30 years, the stock market has returned about eight
percent after inflation and it's been a lot higher over just the past 10 years.
But for our example, today,
we're just going to use that eight percent for our return on investment.
So go back to your spreadsheet and look
to see how high the highest interest rate is.
If it is over eight percent,
then you're going to want to pay down that debt before you invest your money.
And here's why. Let's say you have a credit card that has
a 20 percent interest rate that you were paying down.
If you decide to invest your money
and you're only getting an eight percent return, then you're actually losing money
because you are still paying 20 percent on that credit card debt.
So in actuality, you're losing 12 percent.
But if you decide to pay down that credit card first, before investing,
then you are getting rid of that 20 percent interest that you're paying so
that you can actually start earning money once that debt is paid off because you'll
be making eight percent in the stock market.
And let me show you an example of what I'm talking about.
OK, this is from Huntington Dotcom.
And I'll leave a link to this calculator and the description so that you can play
around with this later and put in your own debts and your own interest rates.
But I just want to show you this example.
Let's say you have ten thousand dollars
on your credit card and that interest rate on your credit card
is 20 percent and you have 12 months to pay off that debt.
And the extra amount that you are putting
toward that debt each month is three hundred and fifty dollars.
And here we have the rate that we would be earning on our investments.
I know it says savings on here, but we are going to say we're investing
that money and we're going to earn eight percent on that investment.
So when you calculate all of those numbers,
paying off your debt will save you over two thousand dollars in interest.
And if you were to invest that money,
you would only be earning one hundred and twenty two dollars on that investment.
So you can play around with this calculator.
Maybe you have twenty thousand dollars in debt instead of that
ten thousand dollars.
So let's change it to twenty thousand, and you have
twenty four months to pay off your debt
and maybe you have five hundred dollars a month that you can contribute.
So now let's take a look.
If you were to pay off your debt with this
criteria, you would save eight thousand nine hundred
and ninety three dollars in interest rather than putting it toward investing,
which would only be seven hundred and forty six dollars.
So you can see where there is such a high
interest rate on your debts and you're not making that much by investing it.
It's better to pay off that high interest at first and then invest your money later.
And I will leave a link to this calculator
below in the description so that you can enter in your actual debts
and the interest rates that you have on your debts.
Hopefully that gives you a clearer picture.
So you want to pay down any high interest debt that you have.
So for sure your credit cards are most
likely going to be over eight percent interest and maybe your student loans
won't be or your mortgage is lower than eight percent.
Then you can switch over and make sure to make your payments on your debts still.
But then you can invest that extra into the stock market so that you can
start making a little bit more money while still paying down your debts.
As a rule of thumb,
if you can earn more interest on your money by investing it,
than it costs you to pay down your debts, then you'd want to invest it.
And if you're thinking,
but I really want to invest my money, actually another benefit of paying down
your debt is that it increases your credit score.
So part of your credit score is calculated by using the utilization rate.
And that just means if you have a lot
of debt and not a lot of income, then your credit score will be lower.
But if you can lower your debt, then that utilization rate is going to be
smaller because you aren't using as much credit.
And that way your credit score will increase.
And if you are wondering how to increase your credit score,
I did create a video for that, I will leave a link above and below.
You can check that out later on.
But that is just another benefit to getting your debt paid down.
And another benefit is just not having
that debt hanging over your head, just weighing you down all of the time.
You can pay that off and just feel so much
more secure and feel so much better about things.
And you won't have that constant worry of, oh, but I have all this debt to pay off.
Now, that being said, I do want to mention that there may be
some opportunities that only come at certain parts in our lives.
So, for example, if you are working at a job that offers
a match on your 401k plan, you may want to invest that money to get
the match because you may not have that job later on.
So I can kind of see where there are
certain circumstances where you may want to invest some of your money instead
of putting it all toward paying down your debts.
Having extra cash is so amazing.
We just want to make sure that we do the best thing with that extra cash.
All right. Hopefully that was helpful for you.
And I want to know if you are going to pay off your debt first or invest first.
So put in the comments and tell me which one you're going to do first.
And if you found this video helpful,
please hit that like button and share it with someone else who needs to hear this
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Thanks so much for watching.
I'll see you in the next video.