Should I Invest, Pay Down Debt or Save?

0:00This message is brought to you by Applecard. Applecard members can earn unlimited daily cash back on everyday purchases wherever they shop. This means you could be earning daily cash on just about anything, like a slice of pizza from your local pizza place or a latte from the corner coffee shop. Apply for Applecard in the wallet app to see your credit limit offer in minutes. Subject to credit approval, Applecard issued by Goldman Sachs Bank USA Salt Lake City branch, terms and more at applecard.com Hello and welcome to friends at Inverse. The podcast that feels like a voice note from your favorite finance friend. I'm some call, I'm wildly passionate about money and each week I break down investing in personal finance so that the group chat can get richer together. Today's episode has come from a recent conversation I had with an investing bestie during our master class.

1:05It was a life call and she was asking me what she should do with $40,000 that she had received and she wasn't sure if she should pay off her debt, if she should invest. Like what she's meant to do and this is such a common question that comes up time and time again and it just feels very overwhelming. Let's say you come into $10,000, you get a bonus, you receive a windfall, if you're American, you stub your toe at a Walmart. I just I don't know how it works over there, but it just seems like the compensation structure is different. If you are in a position where you're like okay well now I have a bit of money, but what on earth do I do some like how do I make sure that I'm doing the smartest thing with my money and I don't set myself up for failure. So in this episode I'm going to break down what to do, what not to do, how to set things up and I'm going to run through my personal decision matrix when it comes to having a bit of extra cash and where to place it so that future you is set up for the best decision and you can go to bed at peace and know with yourself that you've made the right choice and you're not leaving money on the table or doing something that could be financially irresponsible.

2:22Chapter one is just what I like to call the acknowledgement phase where if you come into a little bit of money and you haven't maybe grown up with that or it's more money than you've ever seen. That's usually the case for most of us if we suddenly get $10,000 or $50,000 or like for some people $100,000, you usually even if you earn $100,000, you never see that amount of money just like in your bank account and one go. And so it feels overwhelming and I always like to compare it to that feeling of when you hold a newborn baby and you have your intrusive thoughts and you're like, I don't want to drop this thing to my friends listening that have let me hold their baby I promise I'm not dropping him or her. I just get nervous and I'm like intrusive thought, what if I drop the baby and I live on the other side of a big bridge you're driving on the bridge. And every now and again I'm like, what if I just, you know, what if I just go sideways and just the car goes off I'm not depressed I just it's an intrusive thought and the same thing happens when you suddenly have a bit of money in your bank account like a large sum that you probably have not seen before or obviously very rarely see.

3:32How do you not accidentally just spend it all and this is why one of our investors is said she was like how do I make sure I don't spend like the $40,000 and I had to remind her and also I mean this is something I've experienced myself I just say look it's not like you're going to suddenly go to the casino and drop it all on you know red or black and have a fever dream and wake up in the money's gone that's a very, very unlikely scenario. A lot of steps have to happen for us to end up there and sometimes the smartest thing to do is to take that money put it in a separate account you can open up a new account within your bank that you use. It's probably wiser to even use a second bank account if you've got one with the different banks you don't see the money and just put it away until you decide what you need to do because if it's out of sight it's out of mind you're not going to go and just spend it all and like freak out and buy everything in a Sephora. It doesn't happen and it's not going to happen to you so you just need to trust yourself and now the next part chapter 2 this is probably my favourite part is the decision matrix.

4:41But first let's take a little break. This message is brought to you by Applecard. Applecard members can earn unlimited daily cash back on everyday purchases wherever they shop. This means you could be earning daily cash on just about anything like a slice of pizza from your local pizza place or a latte from the corner coffee shop. Apply for Applecard in the wallet app to see your credit limit offer in minutes. Subject to credit approval Applecard issued by Goldman Sachs Bank USA Salt Lake City branch terms and more at applecard.com. And now back to the show. I've created this matrix because we all have different needs we all have different backgrounds and oftentimes like you'll hear myself say personal finances personal that's why it's personal finance like you might have a different risk tolerance to me you might want to do this differently to me and obviously that comes because you know legally. People cannot give you financial advice unless you are sitting down with a financial advisor one on one you're paying them and and that's you know the only time where someone should look at your personal journey and go okay this is what you should do.

5:52So while I can't do that what I can do is give you like a flow diagram of what works just to point you in the right direction because we're all going to have different needs some of us might have student loan did some of us might have a mortgage some of us might already be investing. But don't have an emergency fund and so all these different versions of us. It's kind of difficult to be like well if you get $10,000 you should absolutely put it into the market or you should absolutely build an emergency fund or you should absolutely pay off all your debt. So how do you figure out what to do now. I have the world's most bare bones basic if you're watching the YouTube video you can see it this is what I'm going to run through with you and this is how we're going to figure out exactly what you need to do. First of all if you have $5,000 $10,000 $20,000 $100,000 step one is you're going to move that money to a separate bank account. Step two is I'm going to ask you a question.

6:53I'm going to say do you have high interest debt. So this is debt that is 5% or more. Some people say 7% or more but I like to say between 5% to 7% and if you're not sure just 5% to 7% if it's more than that this is high interest debt. If the answer to that is yes then it's very very very simple. We start paying down that debt because a high interest rate debt is going to compound in the exact same way that your investments can compound. And so if you're trying to decide between will say I've got $10,000 do I pay down my debts or do I invest in the market. The share might return 7% pre-tax which is great but your debt is accumulating at 5% and paying that down especially high interest debt helps a lot more because that's a guaranteed reduction. You've like earned 5% back if that makes sense because you're not accumulating an interest.

7:57This is now the flow diagram we've got do you have high interest debt. Yes simple we're now going to pay it down that debt. For the people going we'll say I don't have high interest debt. I have a mortgage but that's 4% student loan debt but it's only 3% or if you live in New Zealand it's 0% when the answer is you don't have to pay that down. So you get to answer no I don't have high interest debt. The next question is do you have an emergency fund. An emergency fund is 3 to 6 months of living expenses not your salary. Three months if you are in a stable employee job like your doctor or your teacher or you are in a career where you kind of know if you're in a stable job. Like do people keep getting laid off around you or would it be difficult for you to find work if you like move to a different city or a different country. If the answer is no then that's fantastic you have a very reliable job and so if you think I could find another job within 3 months time then we're just saving 3 months of our emergency expenses.

9:04So this is 3 months of your living expenses in terms of your mortgage or rent, food, electricity bills just like the things to keep the lights on like literally. This is not while I'd like a little bit of shopping and like no it would not including like a large sum of some of my this doesn't have to be like $20,000. This is 3 months of your living expenses. Now if you're someone like me that has a fluctuating income because you're a business owner and you take on bits of work here and there maybe you're a creative or you're on your own business. Your income is going to be more unpredictable and if you lose your job it's going to probably take you and I more than 3 months to find and come again. So in our case we want to have 6 months of living expenses saved up again. Living expenses not salary so if you're making $100,000 a year I'm not saying you need $50,000 saved up that is insanity that is a lot of money and probably not money that is at good use because it's getting eaten away by inflation.

10:116 months living expenses we put it aside. If you start from the top do not have high interest at more than 5% and you do not have an emergency fund of 3 months or 6 months then that is what you're going to do with this windfall money. You are going to pay yourself into an extra bank account you're going to call it rainy day fund or emergency fund. Ideally you look for a bank account that has a good interest rate but we're not looking for a bank account that's going to lock in the money. So we're not looking for one that says hey you can touch this money but you have to give us 90 days notice or this is a term deposit where you can't open it up for another year. We want easy access to this money we want to be able to go oh my god my tire went flat because I drove on the road. I'm so not over this and I hit that little chip of wood and now I need to replace my tires with $600 and obviously I don't keep $600 in my daily checking account so let me pull it out of my emergency fund.

11:16It is not fun if that emergency fund is not something you can access for like 30 days we want instant access. So now you've built your emergency fund we go back up to the top of the list so if you have $10,000 if you have no high interest it perfect the next question for you is do you have an emergency fund of 3 to 6 months and if you do fantastic the next question for you is do you want to invest. Because remember this is really important not everyone wants to I personally think we all should invest I personally think women should have assets that produce income that grow and value through capital gains and dividends. Like I don't see this as being an option but I understand that I'm incredibly biased and so if you want to invest then that is fantastic. And now that extra $10,000 that you have goes towards investing in the share market.

12:16And if you want to some like what do I invest like do I put it all in one go do I lump some investor or do I invest it like slowly like I've had people you know share stories of how they've sold their company so they have like $400,000 to invest that's incredibly incredibly impressive. Do they put it all in one go do they stagger it and what I shared with them was a study that showed that yes you probably should stagger those investments dollar cost average maybe $10,000 a month or $20,000 a month. But another study said that time in the market is better and that oftentimes putting in a lump sum has a better outcome than dollar cost averaging if you are investing at the right time when the market is low which again none of us can predict. And so this idea of like a hybrid model works here let's say rather than $400,000 we're talking about $40,000 maybe you put half of it in the market now $20,000.

13:20And then you put the next like $10,000 every month over the next couple of months that way you've spread your risk maybe it's even $5,000 and you spread your risk so that you take into account what's happening right now and also you are putting a little bit of money over time because even though like experts will say dollar cost average don't put it all in the market. If it's at a time when the market is low and you're like well, some like it just feels like I should put it in it's very like do they say not as I do because there have been times where I've put half of my investments and and then dollar cost average instead of only dollar cost averaging. And so when you break it down that's all there is like it feels so overwhelming it's like oh my god what do I do this is hard do I invest do I pay off debt do I build an emergency fund like what on earth do I do and the answer is very very simple when you have that matrix.

14:22But also it's really important to understand that a lot of times people will also do this and it's not this or maybe you have $30,000 maybe you put $10,000 down on the debt that you have and then you put the rest of the money into the market because you have an emergency fund maybe you don't even have an emergency fund and you put $5,000 away as the start of an emergency fund and then you put the rest into paying off your debt. The best thing about personal finance is that you don't have to do the exact perfect like thing that makes you Warren Buffett reincarnated like you just have to do something and use the best possible like information you have available and trust yourself. And I promise you you're not going to like wake up and like the hangover movie and you've lost all your money and you have no idea where you are and things are like back to zero. It's a very very unlikely to happen and if you're listening to a podcast like this you're watching this on YouTube it's even less likely to happen because you are someone that is actively choosing to be better with your money.

15:30And that gives me a lot of confidence and hope that you're even less likely to end up in a really really really dire situation like a lot of things have to go wrong for us to end up there. So with that I hope you enjoyed this episode. If you want to hear more episodes like this please please please subscribe to us on YouTube leave a comment on YouTube helping us grow our YouTube channel helps us create better resources that therefore makes better content which therefore makes better podcasts for you to listen to. And with that I'll see you next Tuesday. Disclaimer, friends that invest does not provide personalized investing advice for your individual needs. We are not financial advisors. The advice from friends that invest exists for educational purposes only and should not be relied upon to make an investment or financial decision. Advice from friends that invest is general in nature and does not consider individual circumstances. Always do your research and do diligence.