Successful Investors Eliminate Debt!

January 4, 2013

Personal Finance

http://studiesineconomics.wordpress.com

http://studiesineconomics.wordpress.com

If I could make novice investors understand one thing it would be this….

You cannot be a successful investor until you are a successful saver.

And you cannot successfully save money if you are spending it all on debt. This concept is so simple yet rarely understood or practiced.

Let me illustrate my point:

Family A

  • Has an annual income of $60,000 (after taxes)
  • Has annual expenses of $48,000
  • Which leaves them with $12,000 to invest

Family B

  • Has an annual income of $42,000 (after taxes)
  • Has annual expenses of $21,000
  • Which leaves them with $21,000 to invest

Immediately you notice Family A makes more money, but Family B keeps more money because of their willingness to save and get out of debt.

But I’m not done!

Let’s assume that Family A are very savvy investors, so savvy in fact that they can produce 20% annual gains consistently for 10 years. (A rare thing unless you’re Warren Buffet)

Now let us also assume that Family B is in tune with the market. They wouldn’t consider themselves experts but they understand long term trends, Dividend Kings, and options strategies. Utilizing this knowledge they can produce a modest 10% annual gain consistently for 10 years.

Which family do you think comes out on top??? Let’s take a look!

Debt Movement

 

Family B takes the cake by approximately $4k!

Now to be fair I know that if I were to continue this analysis for 20 or 30 years Family A would come out far ahead of Family B.  But let’s be reasonable, who do you know personally who has made a 20% annual gains for 10 years consecutively? The only people I know are hedge fund managers. On the flip side however, I know far more people who can achieve a 10% annual gain.

So what is my point?

I’ve said it before, and I’ll say it again before you invest a penny you need to be out of debt! Yes, I just said that. I’ll say it again too!

BEFORE YOU INVEST A PENNY YOU NEED TO BE OUT OF DEBT!

If you are feeling the need to discredit what I’m saying just answer these two questions:

  • Are investment returns guaranteed?
  • Are you obligated to pay your debts?

By eliminating your debt quickly and efficiently you can set yourself up to be a very successful investor.

Need some motivation??? 

I’ve got an awesome opportunity for you!

The Debt Movement is a project to help people pay off $10,000,000 of debt in 90 days. That’s a lot of debt! But if we work together I believe we can achieve this goal if not more!

Good Financial Cents has partnered with ReadyForZerothe personal finance blogging community and other financial experts to educate you, in your quest of becoming debt free.

Additionally they are offering “Debt Scholarships” to highly motivated individuals.

I can’t wait to see the results of this movement, I encourage EVERYONE to join and help spread the word.

Here’s to our Wealth!

Subscribe To My Newsletter!

Receive my updated 401k monitor, current market conditions, & the best dividend stocks.No cost, just actionable content once a month!

15 Responses to “Successful Investors Eliminate Debt!”

  1. Julie @ The Family CEO Says:

    Awesome post and examples. Your point reminds me of something I was just reading (Money magazine, I think) about how saving a lot is more important than big gains. In other words, the ability to keep expenses low and shovel a lot into savings will serve you better in the long run than saving less and trying to eek out bigger gains.

    Thanks for the food for thought.

    Reply

    • Marvin Says:

      That’s exactly right and that is why I am against rushing into “retirement” so early. Once you give up that income things become a lot harder.

      Reply

  2. JC @ Passive-Income-Pursuit Says:

    Getting interest working for you instead of against you is probably the biggest factor in determining someone’s financial health. The one exception to paying debt off first that I see is through your 401k at work if your company provides a match. That’s a 50% to 100% return that you just can’t duplicate anywhere. As long as you still have enough income left over after contributing just enough to get the match then every other spare penny should be funneled towards getting out of debt. Another way to look at it is this, Family B could earn 0% in the first year and Family A would have to earn a 75% return. There’s not many investments where one person can be completely flat on the year but someone else is +75% thanks to the high correlation between most investment classes that we have now. Great post!

    Reply

    • Marvin Says:

      I agree completely the only investing someone should do with debt is contributing the maximum amount that their employer is matching with their 401k plan.

      Reply

  3. Dan Mac Says:

    Good example of why your individual savings rate is more important than returns you can earn. I’ve seen from my own investing that my monthly contributions to retirement and stock accounts makes the biggest difference in my account totals going up each year. I’m still early in my career though so I hope that will flip once I accumulate more investments. Always great advice to avoid debt as that negatively affects the amount of money you’re able to save.

    Reply

    • Marvin Says:

      I’m glad to hear it! There will be a day when you will see your annual gains outweigh your contributions, that is the day when you break out the champagne =)

      Reply

  4. Martin Says:

    This is what I am fighting with as well. Paying off my debt. Thanks for those websites. I tried one and hope it will help me in eliminating the debt. Currently I pay almost 5k in interest yearly. How much money I could have if instead of paying that money to credit card companies I could save it and invest it!. But I am already working on it.

    Reply

    • Marvin Says:

      It is my opinion that it is harder to pay off debt the more knowledgable you are in investments as you have pointed out. But I still do believe it is imperative to eliminate the debt as quickly as possible. Glad to hear you’re working on it, give me a shout when you pay that debt off!

      Reply

  5. Dustin Small Says:

    Some excellent advice. There are millions of people out there attempting to start investing when they have thousands of dollars in credit card debt at a 20+ percent interest rate. In their situation, even if there WERE able to make a 20% gain in their investment, it’s completely offset by the interest on their debt. This holds true for lower interest debt as well.

    Reply

    • Marvin Says:

      Thank you! It’s so true and it pains me when friends ask me for investment advice but are literally drowning in debt. I’m thinking to myself “You can’t afford to lose ANY money.”

      Reply

Trackbacks/Pingbacks

  1. Lifestyle Carnival 37th edition | Master the Art of Saving - January 13, 2013

    [...] @ Brick By Brick Investing writes Successful Investor Eliminate Debt – Detailed description of why it is imperative for you to eliminate debt if you want to [...]

  2. Carnival of MoneyPros- January 13th 2013 | Master the Art of Saving - January 13, 2013

    [...] @ Brick By Brick Investing writes Successful Investor Eliminate Debt – Detailed description of why it is imperative for you to eliminate debt if you want to [...]

  3. Carnival of Retirement - Simple Budget - January 14, 2013

    [...] @ Brick By Brick Investing writes Successful Investor Eliminate Debt – Detailed description of why it is imperative for you to eliminate debt if you want to [...]

  4. Yakezie Carnival — Narrow Bridge Finance - January 14, 2013

    [...] @ Brick By Brick Investing writes Successful Investor Eliminate Debt – Detailed description of why it is imperative for you to eliminate debt if you want to [...]

  5. Five Fast and Effective Ways to Get Out of Debt - Expenses Pro - December 23, 2013

    […] Image Source: debt […]

Leave a Reply

Proud Member of the Yakezie Challenge