Investing Now vs. Removing Debt
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Recently, I got a visit from a friend and he revealed his current financial status to me. Although he has a seemingly stable job, he’s burdened with many financial responsibilities and debt that are typical of most college graduates. They include:
- Student loans
- Car loans + insurance
- Credit cards (~$10,000)
- Living expenses (rent, food, and etc.)
He tells me that he’ll be receiving a windfall of approximately $10,000 and he wants to take advantage of the cheap stock market. As a friend and cautious money manager, I highly advised against putting that kind of money in stocks. Although my friend is fully aware of his tight situation, he is hoping that stocks would actually make enough to cover his monthly payments plus more. While that is entirely possible, I suggested the safer road – debt removal. The reasons being:
- The ability to clear debt is 100% certain. In our current economic state, the stock market doesn’t guarantee a positive return.
- Removal of debt relieves a source of psychological stress. Participating in the stock market would add a source of psychological stress.
- Debt is the major roadblock to wealth. Debt accumulates if it isn’t paid off in a timely manner. It will remain a money-sucking leech unless it is completely removed.
I introduced to him the two popular debt removal methods: the Debt Snowball by Dave Ramsey and the Debt Avalanche by Flexo at Consumerism Commentary. Luckily, he had an ING Direct savings account, so mentioned the use of a CD ladder for a higher interest rate and to resist the temptation to spend.
Despite know that I provided useful fundamentals to personal finance, I wonder “what if the stock markets takes a turn for the good”. Surely, at his young age, he should be taking more risks right? What are your thoughts?
Video Credit: MoneyTalkNews