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| chop456 |
 Posted: Fri Feb 25, 2005 1:10 pm Post subject: Question |
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Investing Sr. Associate
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| Can we invest to get out of debt, or do we get out of debt so we can invest? |
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| Benjamin |
| Posted: Fri Feb 25, 2005 1:26 pm Post subject: |
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Administrator
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| Well, when your in debt your investing whatever percentage of interest with 0 Return. |
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| lmountford |
| Posted: Sat Feb 26, 2005 5:45 am Post subject: |
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Investing Sr. Associate
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I think some people need to get out of debt just to stay afloat  The thing about investing your way out of debt is it takes knowledge and or luck to ensure a profitable return, in a financial crisis it can be hard to be confident you have either . |
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| ziemerd |
| Posted: Tue Jun 07, 2005 6:04 am Post subject: |
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New Poster
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Isn't the rule of thumb to get out of debt and have 3 months worth of money in an emergency savings account before investing? Two different friends of mine invested for me so I have not used any of my money.
I am totally focused on paying off my debt and putting 10% of my income in a interest bearing savings account. Once I have my debt at least under control, and my savings account built up, then I will look into buying some government bonds and then play in the stock market.
I also think it's wise to only invest with money that you can afford to lose. |
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| blackfoxtrade |
| Posted: Tue Jun 07, 2005 7:16 am Post subject: |
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Associate
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I think it depends.
1)If you have a family, then it is not a very wise thing to do since you really can't afford to lose that little money.
2)If you live alone and have a chance to go to a friends place after you are broke, this may be the way out (I mean investing). Just don't be at your friend's place for too long  |
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| Dave Rathbun |
| Posted: Tue Jun 07, 2005 7:28 am Post subject: |
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CFO
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The amount of reserves you should have depends on your job situation. My job is a bit more risky than some others (I work for a very small consulting company, so work can be spotty at times) so I have 12 months reserves in cash or CDs.
To the question of getting out of debt to invest, or investing to get out of debt... unfortunately the cards are stacked against you.  It is hard to find an investment that pays a higher rate that what you're probably paying on what you owe. So unless you can find a guaranteed investment paying a 33% higher rate than what you owe, the best "investment" you can make is debt reduction.
Why 33% higher? Because the return you earn is taxable. If you are paying 10% on debt and you earn 13.3% on an investment, and you're in the 25% tax bracket, here's how the math works:
Investment: $10,000
Investment Interest: 13.33%
Investment Return: $1,333
Tax @ 25% : $333.25
Net: $999.75
Debt: $10,000
Debt Interest: 10%
Debt Payments: $11,000
Net: $1,000
Investment return - Dept Payments = -$0.25
The 13.33% rate is based on the 10% debt percent rate + 33% higher rate as I mentioned earlier. You can see that you've lost twenty-five cents by investing, rather than paying down debt... and this even though the rate was 33% higher on your investment than on your debt.
Debt reduction is not taxable. If you got a $10,000 windfall and applied it all to the debt as shown above, you end up saving $1,000 that is tax free. |
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