Not going to lie – times are pretty crazy right now, both globally and also in my own personal life! Sometimes when things get crazy, you can tend to lose track of your own personal strategic plan, and that can be disastrous! I mean, even I, Mr. Invest Everything at All Times, have considered if I should use savings to pay off debt.
This is the third Handy Andy’s lesson, with the first two focusing on starting a dividend portfolio and saving money with credit cards, so in true Andy fashion, let’s keep it going with some real-life experience from…well, you know…Handy Andy!
Click to jump to a section:
- Financial Trigger Point
- Choosing the Right Strategy
- Financial Game Plan
- Spend Less Than You Earn
- Pay Off Credit Card
- Contribute to Tax-Advantaged Accounts
- Get the Most Bang for Your Buck
- Getting Past Discomfort
Financial Trigger Point
Everything that has been going on has really got me thinking about the cash flow for my family. I have always been one to talk about the importance of having a “financial trigger point” and being sure to stick to it.
A “financial trigger point” is the point where you decide to pay off debt instead of investing. To explain better – the Compound Annual Growth rate of the S&P 500 since 1950 is 11%. That means you would need to pay off debt with an interest rate of 11% or higher to match or beat the returns that you would’ve realized through the stock market.
The main thing is that the stock market is very volatile. You will have 30% gains in some years, as we did in 2019. Then you will have negative years in others – it depends on the market. The advantage of paying off debt is that it is a 100% guaranteed return.
I have always set my financial trigger point at 6%. To me, 6% was the point where I felt comfortable choosing to pay off debt instead of investing. So, anything over a 6% interest rate would get paid off, and anything under that would get the minimum payment. Anything left over is invested.
Choosing the Right Strategy
Well, like I said, everything going on has been making me question if this is the right strategy.
- Do I need to pay off my debt faster?
- Should I use savings to pay off debt?
- Should I pull out of some of my investments to pay off debt?
If I could pay off some debt, it would free up cash flows for me in the future if things were to get rough. Both my wife and I work for the same company – what if the company experienced hardships and we were laid off?
These are all things I have contemplated, and quite frankly, they have been bothering me a lot lately.
I know this blog post might seem more of me just writing and being a bit emotional. But I really want to tell a true experience I have been going through for quite a few months. I just hope some of you can relate to it.
Fortunately, I can say that as of right now, in July 2020, I have been able to stick to my plan and not adjust my financial trigger point. But the only way I have been able to do this is because I have had a very scripted game plan, and it’s kept me on track.
Financial Game Plan
You might think that this game plan that I speak of is something that is just absolutely insane, but it’s really not. It’s actually super simple:
- Spend less than I earn… AKA budget
- Pay at least minimum payments on all debts and Credit Card in Full
- Continue to put a lot into tax-advantage accounts like IRA, 401K or 403b, HSA, and 529
- Put any excess funds where I will get the most bang for my buck
It’s really not too hard when I actually sit there and think about it. Because I have this process (and have had it for years), it has made it much easier for me to stick to when the times get tough. We will touch on the first three steps and focus on the fourth. Let’s go!
Spend Less Than You Earn
This is a pretty easy one, but if you’re not spending less than you earn, then you need to fix your habits ASAP. I use Doctor Budget, which has helped me become a much more responsible spender, or saver, rather, and my finances can thank me for it.
Doctor Budget is the perfect mix of simplicity, tracking ability, and the ability to be customized, allowing you to get the most from your budget.
Of course, I am a bit biased, but I have stuck with it for about 6 or 7 years now. So if Mint or something else were really that much easier, I would’ve just switched to that. I’m not going to try to persuade you to pick a budgeting platform that’s less efficient just so that I can make $29, lol.
If you don’t, give Doctor Budget a try!
Pay At Least Minimum Payments on All Debts and Credit Card in Full
This seems obvious, but it’s something that you have to do. Even when I am debating about paying extra on debt vs. investing, I always make it a point to pay the minimum payments. If you don’t do that, you’ll get nailed with a late payment that will be brutal. Plus, your credit will have a bad mark for a few years.
If you miss a credit card payment, chances are it’s going to completely wipe out any rewards that you were able to earn throughout the year. So focus on paying off your credit card in full each month.
If you want to boost your credit even further, commit to paying off your credit cards weekly. This will help keep your credit utilization low, boosting your credit further. A credit utilization below 10% is ideal, but keep it below 30% at most.
These are really non-negotiables and are absolute musts if you want to get closer to financial independence.
Continue to Put a Lot into Tax-Advantage Accounts like IRA, 401K, HSA, and 529
I wanted to say, “Continue to max out,” but that isn’t an option for everyone, and it’s not essential for everyone either. For instance, a 401K has a contribution limit of $19K in 2020. That is a pretty large amount of money and it’s hard to max that out. Instead, I recommend that you max out your company match at the minimum.
If your company is going to match you up to 6%, you need to put in at least 6%. A ton of people don’t max out their 401K, and I think it is the biggest mistake that anyone can make with their 401K. You’re getting a 100% ROI right off the bat on the company match, or at least 50% if that’s what the match is. From then on, that FREE MONEY will grow year after year and take full advantage of compound interest. So max that out.
For a Roth IRA and an HSA, I recommend trying to max out both of those. I think the HSA is the best investing tool you can use as an investor because it’s tax-free going in, grows tax-free, and then is spent tax-free…. TRIPLE TAX ADVANTAGE ALERT!
The HSA limit in 2023 for an individual is $3,850 and an IRA is $6,500, so just try to max them out. Even if you can’t, try! If you put your money into a Roth IRA and have to pull it out, then you can take out any contributions for that year penalty free. But these tax advantages are just so major that you need to take advantage of them whenever you can, if you can.
Put Any Excess Funds Where I Will Get the Most Bang for My Buck
To me, this is all about that trigger point that I mentioned above. For me, it’s 6%. To others, it might be something much lower or higher depending on the risk tolerance. I have been going back and forth in my mind about putting extra money into my wife’s Roth IRA that we recently opened.
We just opened her IRA this year. Tax day isn’t for a few months, so we could still put money into the 2019 funding year for her IRA and essentially try to double dip. But, honestly, I have had some potential concerns, primarily about the unknown of having a child and additional expenses. I am entering a mostly unknown part of my life.
So, my thought has been that when I end the month with some extra money in our account, should we pay off our debt or invest it in the market?
The exact situation that I’m looking at is a 5% interest rate, so that means that it’s below my trigger point. Also, if I chose to invest it would be going into a tax-advantaged account. So, every single sign points to putting money into the Roth IRA, right?
Getting Through Discomfort
So, why is it so hard for me to do it? The answer is because of comfort. People like to be comfortable. I feel like the King of Risk and love taking chances, but even I am feeling uneasy about this one.
Multiple times, I have opened the company’s website we borrow money from. I typed in an extra payment on our loan and then backed out. I have been so close, but I just kept thinking I was making an impulsive decision.
The answer is so clear to me when I actually put it on paper and write out my thoughts. But in my head, things are much more confusing and my emotions are getting into the way of it.
I am an analytical, process-oriented type of person. I honestly never thought I’d have this dilemma. Looking back, I’ve probably been too tough and not empathetic for people in these situations.
The major takeaway that I have for you to really do is to figure out your own process. Create your own game plan. You must ensure that when things get tough and convoluted, you have a predetermined course of action about utilizing certain funds.
A predetermined plan can help you break through any discomfort you are feeling. Your plan becomes your source of comfort.
If I didn’t have this game plan, I would’ve made a mistake with these funds. Instead, I am now following the plan and staying on track.
This doesn’t just apply to extra money at the end of the month. It applies to your game plan of budgeting – create your budget amounts for each category and stick to it. It applies to your diet – create a calorie or macronutrient amount and stick to it. It applies to chores around your house – create a to-do list and knock that list out.
It’s all about a game plan and holding yourself accountable. In the personal finance world, this will fall on you completely. Guess what, you (and your family) are the only ones that will be affected by the good or bad decisions that you make.
Everyone’s process and game plan are completely different, and that’s totally fine! The important thing is that you have one….and you follow it!
If you want to reach out to me for any guidance or just someone to help with a similar situation that I just went through, feel free to send me an email at [email protected]. I’ll be happy to help!