Getting your Priorities Straight: Debt First, Investments Later

Stock prices have recently taken a nose dive, straight from 35,000 feet above sea level. Individuals with heavy investments in the equity market, or 401K plans loaded with stock have suffered a tremendous loss. For too many people, their entire life savings is now basically a fraction of what it was only a few months ago, in some cases, only 60 to 70% of what it once was. Some people were completely wiped out of their retirement savings, thanks to the bankruptcies and home foreclosures that occurred, due in large part to poor policy of the federal authorities and bad management by the investment banks, coupled with simple greed and even simpler ignorance of the “exotic” assets acquired by these investment banks. It’s like getting your kid a hedgehog and not understanding that they carry rabies and can cause ringworm.

Yes, stock prices have taken a big hit. But, if you’re lucky enough to have some discretionary income, it’s a great time to buy! Notice, though, that I said “discretionary income.” That means no unsecured debt, such as credit cards, store charge accounts, payday loans or rent to own contracts. There’s bad debt and there’s good debt. The bad debt is the unsecured kind; the good debt is the secured kind that gives you a nice tax break, like the interest you pay on your conventional mortgages and home equity loans. Discretionary implies that your income isn’t needed to buy groceries, pay utilities, or put gasoline in the car. Discretionary means that its “extra,” not money earmarked for anything else.

You will hear a lot of people telling you that now is the time to buy stocks; you’ve heard the adage, “buy low, sell high.” Hmmm. It’s “supposed” to work that way, in theory. Most of the time, it does. Though the past few weeks have certainly bucked the trend; people are anxious to be rid of their stocks now, before it gets worse. They’ve already taken a tremendous loss, if they’ve got stocks, they should hold onto them and wait for the tide to change.

But the truth is that those people telling you to buy stocks are usually stock brokers or equity traders, and even some unscrupulous financial advisers who should be giving you sound financial advice. They’re telling you to buy stocks because, whether or not it’s a bull or bear market -- they will still make money on your equity trade. They’re not there to tell you that in the long run, you will be better off using your income to pay down your 22.9% interest rate bearing credit card, or your 8% car loan or your 6¼% mortgage loan.

There’s no money in it for them, if you do the right thing, the prudent thing. They don’t care how much debt you’ve got, what matters to them is how much stock you buy or sell. These guys are generally commission based, don’t you know.

So, say you listen to your stock broker, and he’s pushing the buy low, sell high line for all its worth. And you go for it. You take $100 that you might normally use to pay extra on your credit card bills, and you buy 20 shares of some stock at $5 a share. Great! A year from now, with maybe a nice ROI (return on your investment), you’re gonna have a nice little nest egg. What a deal! Bear in mind, though, that your stock broker is in business to make money, whether you are losing yours or gaining it.

But let me tell you something that your stock broker won’t tell you: if your return on investment is less than the interest you’re paying on your credit card, or your car loan or even your home mortgage, you are making a major mistake. Even assuming you can get a 10% return on your investment your credit card interest rate is higher than that, maybe even as much as 30 or 40%. So, you better go pull out your crystal ball and pick a real winner. At the end of a year, while you may have a couple of shares of stock in your portfolio, you will still be in the same bad debt position. Isn’t your debt the reason you’ve come here to this website and blog, after all, because you were looking for advice about your burgeoning debt? If it is why you’re here, then you’ve come to the right place because DebtStoppers attorneys can give you the help you really need.

Looking for stock advice? Here’s some – buy and hold. One of the most famous of all stock market investors, Warren Buffett, a man who may know a thing or two about investing, says his favorite holding period is “forever.” But invest only with money you won’t need for at least the next 5 years. The smartest investment we can all make right now is an investment in ourselves and in our future. How do we make that investment? By getting out of debt now!

It’s not a daunting task. Find out exactly where you stand. Make an appointment at a DebtStoppers location near you and take advantage of the free DebtStoppers Personal Debt Analysis.

-- Debt Diva

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