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Episode #22 – Should You Pay Off Debt Before Investing?

In this episode of the High Return Real Estate Show, Jack and Shecky talk about whether or not you should pay off debt before getting into investing. They break down what good and bad debt is…

Key Lessons Learned:

Good Debt vs Bad Debt

  • Not all debt is equal, there is good debt and bad debt. The line can sometimes get blurry but a good rule of thumb is good debt makes you more money, and bad debt costs you.
  • Good debt is debt that allows you to generate a return that you wouldn’t be able to create otherwise or opens up opportunities that you wouldn’t be able to access. If borrowing money allows you to make even more money, for example a business or education, it’s probably good debt to take on.
  • When it comes to buying a house for you or your family, going into too much debt is all too common. You have to be careful about how much house you are buying, how leveraged you are, and what position you are in.
  • Look at the rental market of your local area before buying a home, it can make more sense to rent than buy in certain markets.
  • “Your home is the greatest and biggest and smartest investment you’re going to make” is something realtors say to try to get you to buy a house. The best investments are the ones that make you more money. Home equity is not the same as money in the bank.

It Depends…

  • Going into debt to learn a new skill is not always the right choice, it depends on how marketable the skill is.
  • Buying something that you can’t really afford on credit card debt isn’t always a bad choice, it depends on the total cost once you pay off the debt and the thing being purchased. Is there any other way you can buy that thing that doesn’t require you to use credit? Are there other alternatives?
  • Really think about what you are spending your money on. It’s easy to spend a lot of money on things like food and coffee that add up over time, especially if you add in interest.

Your Car

  • We tie a lot of our self image to the kind of car we drive.
  • Car dealerships are masters at appealing to our sense of getting a good deal.
  • The automobile depreciates extremely quickly. In terms of an investment, a vehicle is a poor choice.
  • Repair costs are insignificant compared to the amount of depreciation the vehicle is exposed to.
  • Technology in cars is accelerating, cars being produced today are depreciating even faster as they are becoming outdated quicker.
  • Find a used car and drive it until the wheels fall off. The money you save can be invested.

Making Better Decisions

  • You have to have very clear vision and goals and know where you’re going.
  • Most people won’t have the discipline to build their future.
  • Toys like boats and snowmobiles can be a good choice for some people who will really get a lot of use and enjoyment out of it, but it’s much more likely to be bad debt and the wrong place to spend your limited resources.
  • You have to live within your means.
  • The ultimate answer to whether you should pay off debt before investing is: it depends. Look at your risk tolerance and the spread of the opportunity you are considering. What are you investing that money into and what can you be using it to pay off instead? It’s hard to find an investment that can outpace the interest rate on credit card debt.
  • If you want to pay off debt right now, consider getting a second job. There are only two ways to increase your income, make more money or reduce your expenses.

Resources Mentioned

The Millionaire Next Door

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