How to out invest your debt [get rid of debt first].

No investment advisor in America can out invest your debt load. So, get rid of it first.

Debt and investments are a bad combo!

Let’s get right to the math first. If the average return on your retirement investments is between 9-10%, then your gain after taxes, investment expense, and inflation are hovering around 3% or less. If you credit card interest rate is 3% or more, then you are already losing money. Let’s add that car payment at 5% interest, and value loss of 10-12% annually, and we are really hurting. Finally, we can’t forget about the Mortgage rate. Even at 3.25% in today’s world we just diving further into this financial hole all created by debt. 

So, if I cannot out invest my debt, then what can I do to begin building a retirement? That is exactly what we are going to discover. No gimmicks, no tricks, just the truth about money, math, and interest.

What is Retirement Investing, and Why Does it Matter?

Retirement investing is simply defined as saving money in a tax-advantage account and purchasing assets that will grow so you have money for living expenses during retirement. 

Typically, most working Americans will invest in their company’s 401(K) or IRA as an employee benefit. However, as self-employed individuals we need to think of ways to get the same great tax advantage and growth out of our retirement funds. We do this by setting up IRA accounts that we personally manage, or that we have an investment advisor, like Barklee Financial Group LLC, manage for a small fee. The goal is the same, growth of our money for future living expenses. 

The biggest hurdle to having a large enough nest egg by the time you reach retirement is twofold: 

  • Interest: the interest you pay on consumer debt is taking away your growth from your retirement funds. 
  • Principal Payments: we buy consumer items with debt because we do not have the money to pay for it today. The trick is making you think you have enough money if you stretch it out over 5 or 15 years. This myth is just as big as out investing your interest payments because you don’t usually have enough money to make your principle payments AND successfully invest in retirement. The math does not add up. 

So, let’s look at the simple, yet quickest way, to invest for retirement. 

How to properly invest for retirement: 

#1 Pay off your debt as fast as possible: 

It does not matter what stage of life you are in; interest payments and large principal payments will eat your retirement funds away the fastest. The most crucial step to building and maintaining wealth is to get out of debt and stay out of debt. I highly recommend the debt snowball produced by Ramsey Solutions. This method is proven to be the most efficient method in paying off debt, and there are no tricks and special secrets involved: 

  • List your debts out by total balance from smallest to largest, except for the house.  
  • Pay off the smallest debt as fast as you possible can, while making minimum payments on the remaining. 
  • Once the smallest is paid off, use that monthly payment to attack the next smallest debt with intensity.
  • Pay off the next smallest debt in order until all debts are paid off. 

#2 Open an individual IRA with a trusted investment advisor: 

It pays to have a trusted and knowledgeable investment advisor by your side when opening your first investment account.  Realizing that the term IRA is merely a set of rules for how the account will be taxed, we also need to know where to invest our money once it is in the account. Not only will the IA teach you about the different types of accounts, that person will also be able to take care of rollovers from prior company accounts.  

Are you running your own business and need the option to invest more into a tax deferred account? Small business owners have the option to open SIMPLE IRA’s and 401(k)’s just like a large business offering employee benefits. Some owners can invest up to $52,000 a year towards retirement. Please do not tread these waters alone, however, as there are many caveats for this type of set up. 

#3 Invest 15% of your gross income in to good, growth stock mutual funds: 

If the use of debt is not controversial enough, how you invest your funds can typically takes the cake. I am a firm believer in investing in growth type mutual funds that have great 10 – 15-year track records due to their diversity and ability to outperform the stock market. We will write more on exactly how to pick and choose from differing funds, but for now you want your advisor to diversify and find mutual funds averaging 10% annual growth or more over a 10-year period.

In a nutshell….

Remember, money management is a behavior, and the worst financial behavior is using debt to get what you want. Investing for retirement, our children’s college tuition and other goals will be one of your greatest financial achievements, so do not let it get stolen one interest payment at a time. Once you are out of debt, including everything but the house, stay out of debt for good. Vow to never go back. 

Once you have begun investing, do not take that money out until it is time. You do not realize your losses in a down market unless you make an actual transaction, like selling your investments. Keep the money where it needs to be, and the stock market will return. At least it has since the day it was created.  

What now……

Barklee’s Money Savvy Institute is growing and adding education resources and courses daily. If you have found hope in this short How To, sign up for what is coming next. You will not want to miss it.

Published by Jeremy Knight

Hi! I love people, and helping people become Money Savvy!

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