I am excited to tell you all about our approach to investing money in the market. Everyone I work with wants to talk about investing… for good reason! Investing seems so sexy and sophisticated and exciting, right? Your money’s out there making more money for you while you sleep and eat and binge-watch Netflix. How amazing is that?
But before I get to some of our personal dos and don’ts, I’m devoting an entire post to Step 0. I’m going to yell about it here because it’s my website, dang it, and it’s really important to me that you hear this:
Before you start investing, pay off all non-mortgage debt.
Yes, I know that getting started on investing early is REALLY important. “Time in the markets is more important than timing the markets.”
When you invest before you have paid off your debt, you’re being fatally optimistic. “The rate of return I’m getting from the markets is bigger than the interest rate I’m paying on my debt!” Ok… but the interest you’re paying on your debt is taking a big ol’ bite out of what your actual net monthly rate of return could be.
But let’s say you have 0% interest so you feel like you’re safe. What happens if the markets have a downturn, and then you lose your job? (Although the labor market is tight right now, 2008 just called and wants to remind you that this could totally happen.) You’ve still got that payment to make, and if you find yourself forced to pull money out of the market to make your payments, you will realize (i.e., lock in) those losses. Then, Future You loses out on a big fat payout when the markets go bull again – all because you weren’t sufficiently insulated against risk.
A big part of Fortuna’s mission (and the logic behind our logo) is to help you prepare to weather life’s downturns and make the most of the upswings. I can’t in good conscience tell you that it’s a good idea to put real money into investing when you’ve still got any debt that isn’t a mortgage. The risk is just too high.
Apart from that, I personally am an easily distracted little goldfish. I like going HAM on one goal at a time whenever possible, and I’m not alone. Most of us do better focusing on one thing at a time instead of trying to do a whole bunch of things gradually – it’s just easier to stay pumped up because you’re seeing progress instead of spreading yourself too thin.
If you still have non-mortgage debt – student loans, car loans, credit cards – and you are mentally ready to get very serious about paying it off, waiting to invest can help you stay motivated. The debt will go away faster with the would-be-retirement-cash piled on it. If you are really excited about investing, your enthusiasm will fuel you to get over that obstacle even faster. And when you are debt-free, you will have plenty of time to catch up because you will have control of all your money instead of paying interest on debt.
That being said: if you’ve ALREADY been investing in retirement accounts, leave that money alone! Don’t ever early-withdraw or borrow against a 401(k) or other retirement account unless it’s to avoid a foreclosure or bankruptcy (and sometimes not even then). The risk and penalties are significant — like, 10% on top of your tax rate significant. Just pump the brakes for now.
GET OUT OF DEBT, FRIENDS. And then invest. You will sleep better and wake up richer. And if you really, truly hate the delicious feeling of being debt-free and having control of every single dollar you earn, you can run right back out and borrow a giant pile of money and flip me the bird on your way home from the bank. I won’t even be mad.
If you want to talk more about how this rule applies to your individual situation, book some time with our shiny new booking buttons — we’ll talk through your Big Financial Picture and figure out your way ahead. I can’t wait to talk to you — even if you just want to fight with me about why you don’t want to get out of debt yet. (Is it that you don’t think you can do it? Because you can. I’ll show you how. Really.)
[…] If you have no non-mortgage debt and at least 3 months of expenses in a designated emergency fund (e-fund for short, in a high yield savings account), you are ready to start. We talk about why you want to pay off your debts first here. […]
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