Investing While in You’re in Debt
We were sitting at the restaurant and our waiter was clearing our table. I looked up and said, “I’ve got a question for you.” He looked wary, I’m sure thinking I was going to ask for something else or complain. “I’m a financial coach. What question would you ask that you need answering?”
He brightened: “I need help understanding investments!”
I assessed the restaurant and thought to myself that he might be doing better on his tips than I expected. “Let me ask you this: how’s your debt to income ratio?”
“Fine,” he replied. “About 40% of my pay goes to debt.” He paused. “If anything happened to this job, though, I’d be in trouble. Would probably lose my car.”
He moved on without a thought to why I asked about debt when what he wanted was investment advice.
What I know is that we all think that we should be investing, but - as an investment advisor once told me - there’s no point in investing if you’re heavily in debt.
At the time I had the conversation with the advisor, I was planning on going to grad school. He wisely said, “pay for grad school and pay off your loans, and then we’ll talk.”
But most people think “But I want to get ahead, and I can probably make 10-12% in the stock market, and my interest on my car is only 7%. I can make 4%.
I’m not an investment guru, but I can tell you that earning 10-12% in the stock market isn’t a sure thing. Sometimes you make money, and sometimes you lose money. The only sure way to make money in the stock market is to have it there for a long time - and if you’re in debt, thats exactly the money you need to pay back your creditors.
Investing is a bit like juggling. You’ll get better over time, but you’ll drop a lot of balls in the beginning and you’ll drop a ball here and there as you progress. And dropping a ball when you’re standing on solid ground is one thing.
But being in debt while investing is like standing in the middle of a see-saw while you’re juggling.
It’s one thing to juggle on solid ground, it’s another to juggle while you’re trying to balance on a seesaw. The risk and instability is much higher.
So, what’s the first step in investing? Filling in the dirt hole of debt. It’s not glamorous.
And let's be honest, filling in the debt of our past behavior requires us to make the changes in behavior and decisions we didn’t make in the past.
It’s hard work, and challenging for us to change. But the challenge itself is what makes us better for the future.
