Debt Guide – Step 7 – Investing

Contents

Prerequisites – Investing

Before investing you should have no debt – no credit card debt, no student loans, etc. A mortgage is ok. :) You should also have an appropriately sized emergency fund. Read through this section before finishing your debt snowball and put it into practice immediately after your last debt snowball payment.

Action

Do whatever you damn well please. Choose a goal and go for it, or choose two and split your investments to work towards both at once. The key is to make it automatic through automatic transfers, just as your debt payments were automatic.

If you can’t decide, then follow the steps below.

Basic Investing

If you can’t decide what to invest in you should do the following. Each item is listed in order, so that if there’s extra money left over from one step you can use it on the next, or if you’re done with one step you can then send the money to the next.

  1. Max out your 401K contributions.
  2. Pay off your mortgage, if you have one.
  3. Open an IRA at Betterment.com and invest as much as you’re legally allowed to invest into it each year.
    1. Betterment will help with this and answer your questions as to which type of IRA to open.
  4. Invest into a normal investment account at Betterment.com, until you have 25 to 30 times your yearly expenses invested, then retire and live off of your investment income (at any age).

When investing, remember these two rules.

  • Do not use an actively managed fund.
  • Do use ETF or other low fee options.

Questions

Wouldn’t it be better to pay off a home mortgage before investing in a 401K?

There are some good arguments to paying off a mortgage before investing in a 401K. It may be a less risky investment, it’s good to get rid of any kind of debt, and to many it just feels right. The problem with paying off your mortgage first is that once you make extra payments towards the mortgage you can’t get that money back without taking out a new loan. When you invest in a 401K there are some (although limited) ways you can get that money back before you retire. What puts a 401K at the top of the list is the potential employer match – it’s free money! 

You’re Done When

If you chose your own goals, then only you can decide when you’re done. If you followed the goals I’ve outlined for you, then you’ll be done when you have about 27 times your yearly expenses invested. For example, if you live off of $50,000 per year you’ll want about $1.25 to $1.5 million invested before retiring and living off of the gains. You’ll need less if you’re closer to retirement age.

When you’re done, you’re financially independent. You work if you want to, or not. Your investments provide enough income for you to live and to do any “extras” that you’d like to do, such as giving to relatives or charitable associations. You track your investments and your spending regularly to stay informed and aware. You have enough money to do whatever you want in life – travel the world and live in a different country every month for 10 years, continue working, or whatever. This does NOT mean owning a rolls royce and 3 airplanes. That would be silly. Obviously you can only fly one airplane at a time.

Where To Go From Here

We’ve covered a lot of information here and there’s a lot to put into place. It’s important to remember though that you can’t neglect your relationship with money.

Now that you’ve made it all the way through and know exactly what you need to do to handle your money, you’ll want to hold onto it. The best way to do that is to continue learning by reading and by taking a personal interest in your own happiness. A great place to start is with the book “Your Money or Your Life.“

Epilogue

Good luck.