Investing while in debt is like running up a down escalator. Every month, you’re paying a significant chunk of your hard-earned money towards interest. You can try and invest, but there’s no point because the debt will likely ballon in size faster than your investments.
Compound growth can be the most powerful thing to your financial life or the most destructive. When investing, you harness the power of compound growth and use it to become RICH. When in debt, compound growth works against you and you help make the banks wildly profitable.
If you ever find yourself with high interest debt, your number one priority should be to eliminate all the debt as fast as you can. By focusing on paying off high interest rate debt first, you’re essentially giving yourself a guaranteed return on your money. Once you’ve cleared that debt, you’ll have the financial freedom and flexibility to invest without the burden of those hefty interest charges.
Related to this, one question we get asked all the time is if you should pay off your mortgage before you invest. A lot of smart people disagree on this. Mathematically speaking, if your interest rate is below 10% and assuming that investing will get an average return of 10%, you’re better off investing. But the market is not consistent and it could give you a negative return for multiple years in a row. And mentally, it can feel great to clear all debt off your plate and focus 100% of your energy on investing. At the end of the day it’s a decision based on personal preference.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Vivi & Shane
