Warning: some more rambling ahead...
I'm not exactly in an enviable financial position at the very moment, although I definitely won't complain either. I'm the first woman in my family earning the amount of money I do and I'll definitely be the first woman in my family with either a self-financed Hermes Kelly, Birkin, or Lindy - or all three.
People might be wondering why it has taken me over eight years to be on the precipice of obliterating my debt once and for all. Eight years is a long time, but I think part of the reason it's taken this long aside from my constant obssession with shopping is I had been investing and at the same time focused on debt obliteration most of the time. Now that my portfolio is down in the double digits, I wonder all the time whether I've taken the wrong path.
But at the time, given the benefits of compounding and low interest rates, I chose to invest and at the same time pay off my debt. Now, I know compounding can work against you too - especially when you're just starting out and don't know what you're doing. The blessing in disguise is that when I do finally become financially free, I won't be starting out from zero again. However much my portfolio will be worth then, at least I'll have relatively liquid assets.
Anyway, I do want to point out that one's mindset when investing with debt vs. investing when you're fully financially free will probably be very different. I've definitely committed some financially suicidal moves over the past few years, which if I had been fully financially free, would probably not have made.
So, looking back, did I take the wrong financial path? Maybe I shouldn't even look at it that way. All I know is I've taken all these steps to financial freedom. I had to work really, really hard, but that actually made me feel like I deserve financial freedom. Being who I am, I probably wouldn't have wanted it any other way. So, I should now focus on what I could be doing next to make my portfolio better than ever before.
It was quite interesting when Hillary Clinton was running for President (and I insist to this day that she should have been elected), she had suggested that home economics, including financial budgeting, be reintroduced into the education system. I'm all for it. I had to read a ton of books and do a lot of research to learn basic financial management skills. Even if you study at a university that is supposed to be specialised in finance, they won't teach you the basics - which is what's most important. For some people, this stuff might come naturally, but judging from the state of our economy, it's definitely not the case for the majority of people. So for anyone feeling terrible / lost / hopeless about their financial situation, you need to keep your hope up and know you can get out of it even if you're a chronic shopaholic like myself.
Anyway, back to the subject of investing vs. debt obliteration... if you're in a similar situation, do you choose investing or fast-track debt obliteration?
The short answer is if you know what you're doing with investing and if you could get very low interest rates, then investing whilst carrying debt makes sense. I was able to get interest rates of 3% or less about 50-60% of the time I was carrying a lot of debt. Back when I could get a 5.5% APY on a savings account, keeping the cash in my account made a lot of sense. Not anymore.
If, however, you've got astronomical interest rates, then investing with debt is financially sinful in my diva opinion. The historical rate of return on stocks is about 10% annually. Factoring in taxes and inflation, your expected rate of return on your portfolio must be much higher than your APR in order for investing to make sense.
Now, what can you do to get out of debt?
1. It may sound simple and it's going to be a bit of do as I say not as I do, but the first step is to ensure that what you do earn is greater than what you spend. Many people will look at their gross salary and think it's a lot and go out and basically spend it all and wonder why they have nothing left. Been there, done that. Looking at your net salary is what matters most in budgeting.
2. Be strategic and map out all your debt in Excel. List out any and all debt you have along with APR rates so that you're never in denial. Pay off the highest interest debt first.
3. Renegotiate your APR. Even if your credit score is not ideal, don't let it stop you from calling your bank and at least attempting to renegotiate your APR on any of your loans or credit cards. I do it all the time and banks are usually responsive as I have a good credit score. Even if you save 1 or 2% a year, your savings will add up.
3. What has helped me a lot during the past year is paying cash or using my debit card for every purchase. With cash, you can implement the envelope method, which is splitting your cash up into envelopes with labels such as utilities bills, rent, spa, dinner, etc. I know it sounds elementary, but it works!
4. Freeze your debt. Don't add to it. I put myself on a two-week financial diet last month, living on only 15 Euros a day. It was torture, but at the same time, I didn't feel any more or less happy. I did have to go to the spa much less, but when I did go, I ended up appreciating it more. To accelerate my debt obliteration, I may have to do this more often this year. For some more ideas, refer to The Motley Fool.
5. Perhaps most importantly, try to increase your cash flow. If you get a large tax refund every year, you can request to lower the amount of taxes deducted from your paycheck so that you don't give Uncle Sam an interest-free loan. And if you're really a workaholic, then you can get a second job.
Once you're financially free, congratulate yourself and never backtrack.
To stand on your own financially must be the most amazing feeling ever! Just a few more months to go...
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