Should I invest, or should I pay off my debt first? Good question! And I love exploring this topic with my clients and finding a fitting solution.

I may not know your personal circumstances to sensibly advise you, but I do know that the first step to building wealth and being financially free is to truly understand your HABITS. I always say that wealth is 90% behaviour and only 10% investment knowledge. So, there are some things to consider when it comes to deciding to invest your money, or to pay off your debt, or to find a happy medium!

Show notes

• The most important consideration is your own behaviour – have an honest conversation with yourself

• Understanding your short-and long-term debt and their linked interest rates

• The mindful habit of investing and thinking of your future - even it is small amounts

• The golden rule of wealth is to NEVER use capital to fund expenses

• Better to pay off short-term debt first - credit cards, personal loans, clothing accounts, etc.

• Long-term debt goals - you should pay at least one month’s extra payment a year

• The practice of “taking the money off the table”

• Small regular investments beat lump sum investments any day!

Related articles

If you enjoyed this podcast, we suggest listening to How to start investing and Four things you need to know about your house.

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TRANSCRIPT

  Hello everybody and welcome to today's episode of Working Women's Wealth. We're going to be chatting about a question that I get asked pretty often, on if I have a little bit extra should I invest it or should I pay off my debt. It's a question that is very difficult to answer because I don't know you or your personal circumstances but I can give you some guidance as to how to approach it and what you should think about in order to come to a right answer for you.

The first is whether or not it’s short term debt, such as credit cards, personal loans, store credit – e.g. a clothing store or long term debt such as your house or car.  If it’s short term debt, then the answer is easier – definitely pay off your short term debt first.  Because this has highest interest rates and means that you pay for that dress twice or three times because the interest rates are so high.

But even if short term debt is where you should focus, I still believe it’s good to get into the habit of investing even if it’s R200 or $20.  It’s a huge mindset shift that happens inside you to know that you’re doing SOMETHING for your future.  And every small amount matters over time.

When it comes to long term debt such as your car and house and even student loans, there are many factors to consider.  I put student loans in this ‘long term debt’ category because usually they have lower interest rates than short term debt, and you’re able to pay it off over a long time.  And your education is an investment.

1.       The most important consideration is your own behaviour

I always say that wealth is 90% behaviour and only 10% investment knowledge.  And answering almost all questions when it comes to creating wealth start with an honest understanding of your own behaviour.

Many of us have the facility to access the money we put into our mortgage.  So we put some money in and build up a nice buffer of capital, and then end up using it to fund expenses when we are a little short.  I talk extensively about this in Episode 36 – Four things you need to know about your house

I speak from personal experience when I say that you’ll be shocked when you net out all the pluss’s and minus’s that often over a 12 month period, you take out more than you put in.

The golden rule to wealth is NEVER use capital to fund expenses. 

So, if you use your homeloan to manage cashflow, putting in money at the beginning of the month and drawing out through the month, then don’t save extra money here.  The theory is good, the behaviour in practice doesn’t work.

Your mortgage should ONLY be used to pay down your house.  So in this circumstance, definitely invest rather than pay down your homeloan.  You are far less likely to access your investments than you are to access your mortgage

It comes under the principal I talk about often – take money ‘off the table’… put it in places you can’t access.  It’s amazing how me make a plan – the plan we should do rather than the easy option.

2.       You should pay 1 month’s extra payment a year

If you are using your home loan only for your house, then you should definitely pay off one extra payment per year.  In the US and UK, that will shorten your time to pay off your homeloan by 2-3 years.  In countries where interest rates are higher, such as South Africa, you save around 6 years of payments by doing this.

I tell my clients to either take one extra payment from their bonus, or divide the payment in 12 and each month pay 1/12th extra (or 1/11th if you want extra money at Christmas) so that you pay it off.

Do this for your car payment too – at least 1 extra payment.

3.       Never forget, small regular investments beat big bang any day

Then, any extra, invest.  However small an amount that is.  In episode 4 – how to start investing I share with you that just R200 per month ($20) from 20-70, you can have R18.5m or over a million dollars.  Regular consistent amounts over a long period of time are king. 

And set up an investing account takes money off the table, and allows you to have the account at a time when there’s a little more available.  A regular small standing order each month, together with ad hoc payments, and before you know it, you will be on track to having a whole lot extra.

The first step to wealth is truly understanding your behaviour – will you spend extra money in your home loan or other easy to access accounts.  I find putting money where I can’t get it is the most important thing I can do to ensure long term success. 

If you need access to money, rather build up 3 months of income into a money market account and access that.  Then your investments stay investments, and not used to fund expenses

I just got a hold of my 21 year old cousin and said to her that she should definitely be opening an account for a tiny little bit of money every single month and I really advise each one of us to make sure that we do it. So going back to the first step of wealth and of this particular problem is to truly be honest and understand your behavior. Will you spend the extra money if you have access to it? Or will you be able to put it in a place where you can't access it and it can grow over the long term?

If you need access to cash, rather set up a separate account, your three months worth of emergency funds and make sure that you access that rather than accessing any extra capital. I also recommend that you go onto our website, download our cheat sheet, how to invest in six steps. It's really important that each of us gets to grips with this very important part of our financial wealth. I'm Lisa Linfield and this is Working Women's Wealth. And download that cheat sheet in order to find out about the six steps of starting investing. Take care and have a great week.