“Balancing your money is the key to having enough.” – Elizabeth Warren
Nowadays debt is no stranger. Student loans, mortgages, credit cards, many of us need to rely on credit or loans to get what we need. Yet, when you have loans to pay back, how can you start investing for the future? Especially if you want to pay down those loans at an increased speed? Many of us feel it’s almost impossible to starting investing for the future until we are debt free. For some who take this path, they won’t start investing until their mid 30’s to early 40’s; which won’t leave them much time to build a steady nest egg for their retirement. The million dollar question is how can you start investing when you are young, have debt, and just starting out in a career? Here are my three ways you can start to do all of the above today:
Pay Yourself First – Any Robert Kiyosaki fans in the house? If you haven’t read Rich Dad, Poor DadI would highly recommend it. In his financial thriller Kiyosaki introduces the concept of paying yourself first. What does this mean? It means setting up automatic deductions and contributing to your simple IRA or 401k through work. How does this help? The biggest reason this helps is many times employers offer a percentage match of your contributions which means you’re making more money on top of your contributions. There are also several tax advantages upon the withdrawl of your money depending on what type of retirement account you have.
The second reason is because your money is going to grow faster in an IRA or 401k than in your traditional bank savings account. Most simple IRA’s, Roth IRAs, and 401k retirement funds are invested in several long term growth mutual funds which offer a healthy asset allocation of both stocks and bonds, this offers a decent percentage of growth over time. Of course these funds vary but once again you’ll see a better return compared to the 1% return you might make in a traditional bank savings account. By giving as much money as you can to your retirement accounts through work, you’ll be able to stash away money and start investing while paying down any loans. If things are already tight financially look at ways you can cut back. For instance if you spend $100 a month eating out, you might be able to stay in and contribute that $100/mo to your retirement fund.
Save Your Pennies – In my opinion stashing money away in a savings account isn’t a bad thing, as long as you have intentions of investing it. As previously stated, the reason many financial advisors advise to not stash money away in your bank account to save for retirement is due to such low interest rates associated with savings and checking accounts. Yet, there are other financial vehicles you can use to grow your money. For me, that vehicle has primarily been real estate. I have been known to live extremely frugally, save up a bunch of money, and then drop it on an investment property which will make me money for years to come.
So what is the point of investing in real estate? The point is to not only create equity in your property but you can essentially live for free by house hacking. House hacking, a term coined by Biggerpockets, is when you buy a multifamily property, live in one of the units, and rent out the other units on the property. From my first house hack I lived for a little under $700/mo due to my tenants helping out with the mortgage, not bad for Northern New Jersey; now, with the entire house rented out I make about $700/mo in rental income after the monthly mortgage is paid. Once the mortgage on that house is paid off entirely in the next 20-30 years I’ll be making about 30k a year from that house alone. I’ll always be a big advocate for real estate as I feel it’s an amazing investment tool to build and accumulate wealth.
Now I know what you might be thinking A) I don’t have anything close to a down payment to put down on a house or B) isn’t a mortgage a massive amount of debt? Both thoughts are certainly valid. With my home, I used an FHA loan which allowed me to put down as little as 3.5% of the home’s sales price so I didn’t have to deplete my savings by purchasing a home. The only condition with an FHA loan is that you must live in the property for at least one year, as this is an owner occupant loan.
Additionally when it comes to debt I believe there is good debt and bad debt. I would classify bad debt as anything you specifically need to pay off: student loans, credit card debt, rent, and even a mortgage where you are the only resource paying it off. I would define good debt as a mortgage which is paid off by tenants or another resource such as Air BNB. This way it’s not really money out of your pocket AND with every mortgage payment from your tenants you create more equity in your property! Want to know more about real estate investing? Check out Biggerpockets and be sure to check out Scott Trench’s book – Set For Life, which covers how to house hack and building wealth through real estate investment.
Save Your Pennies Some More – A really good way to invest while having debt, which I feel is rarely covered, is to become a lender. How do you become a lender? Well you need to save, save, and save some more. When you save a generous amount of money, put yourself out there to people who might want to borrow your money and charge them interest on the borrowed money to make money on your money. Again this loan could be in the form of a down payment for a car, home, or even a small business that someone might need. There are now sites like Lending Club which offers peer to peer lending. You supply the money and then make interest (about 4-6%) on your money while the borrower pays you back. Not bad for just saving!
Conclusion – Having debt doesn’t limit you from saving. By being frugal and taking these steps you can be on your way to creating wealth while still paying back any loans or debt you may have. As all things, saving money and investing takes knowledge and discipline. It’s super important to read up and educate yourself before investing! For more information check out our Resourcespage which includes some good reads and blogs that cover different forms of investing. Have any questions, comments, or ideas about investing? Let us know in the comments below!