Get Out of Debt - Part 1
There are a lot of people in the world that just want to be debt free. It can be very easy to get into debt and a lot of times we do it without realizing. Getting into debt can often start out as a slow process, you need a car so you go for the BMW that will only cost you 5000 dollars per month instead of paying that amount in cash for an older Ford, and of course you need a house, and wouldn’t it be nice to pay for your shopping on the credit card and let your bank sort it all out for you. Come the end of the month and the bank is debiting $5,000 for your car $10,000 for your house and before you know it, you’re in debt.
I cannot stress enough how important it is to clear any debt you might have before you consider any form of investment plan. Let me try to illustrate this with an example. Lets say that you have a credit card debt of $4,000 at an interest rate of 18% which you are paying $150 per month into. You will have paid off your card in 35 months and you will end up paying $5,250. Now lets say that around the same time you decide to start an investment portfolio. You commit to paying $150 per month into this investment and you’re managing to do 15% per anum (which is not the easiest but its doable). By the end of 35 months your investment portfolio will be at $6,500 with a total amount of $5,250 invested, unfortunately the $1,250 that you have managed to make will have all gone to pay the interest on your credit card loan, so you really would have made $0.00. That’s not so inspiring after 35 months of toil.
Now lets say that you decide to pay off your debt first before taking on any investment. So instead of paying $150 into the credit card and $150 into your investment, you decide to put all $300 into your credit card until you have it all paid off. Your credit card will be paid off in 15 months and you will have paid a total of $4,500. Now you have 20 months left to invest, you decide to go for the same investment at 15% but now you are able to put in $300 since nothing is going towards the credit card. By the end of 20 months your investment has grown to $6,700 with an investment of $6,000. So in 35 months you will have spent $500 in interest to the bank but you will have made $700 dollars in interest from your investment, so in essence you end up with $200.
In both cases you spend the exact same amount of money, $300 per month over the period of 20 months. In the first scenario where you’re paying $150 into the card and $150 into the investment you end up with $0.00. But in the second scenario, by simply putting $300 into the debt first and then $300 into the investment after, you actually manage to come away with $200 profit from your investment.
So the important thing to remember from here is to pay any debt you might have first, before you think about any form of investment. In part 2 I’ll give some tips on how you can go about paying off your debt.
Simon
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