Of course, whatever amount you choose to add to your account will mean that money is not being spent on something else, and setting a personal budget and savings priorities involves dedication and discipline. It might mean no second latte or one less beer with your friends, but investing in your future involves some degree of sacrifice.
That brings me to the second obstacle to improving your financial situation, and that is setting the right priorities. Often students ask me where they can find high-yielding investments and bring me examples of double-digit returns from stocks, mutual funds and other investments. But many times they have failed to do a complete evaluation of their current financial situation. The one thing most often overlooked? Current debt. If we’re serious about improving our financial picture, we have to look at what we are allowing our money to do for others before we can focus on having it work for us.
Here I am not talking about student loans that will not kick in until well after graduation. No, I’m talking about credit cards, car loans and other forms of consumer credit. The short version of the story is this. It doesn’t make a lot of sense to take a risk hoping to achieve a 6% return in the stock market, when at the same time you’re paying the minimum required payment on a 14% APR credit card.
In fairness, I always counsel students that it is important to attack your debts but to also make sure you allocate at least some amount of money toward your investment portfolio. But any smart money manager will tell you that paying as much as you can to reduce the balance on your high interest rate credit card is effectively the same as making that same high rate on your money. In the example above, if you continue to make minimum payments and actually do receive a 6% return on your selected investment, you’re still 8% worse off! Pay off that credit card as soon as you possibly can, and you can then put all of the money that would have gone in your lender’s pocket into your own.
Just as the concept of the time value of money tells us that the sooner we invest, the greater the rewards we will receive over time, another equally important concept is opportunity cost and the simple logic of looking for the opportunity that provides the best return. What strategy will help us achieve the greatest overall return on our investments? It all begins with an honest reflection on where your money is currently going in order to properly prioritize. Should you pay 14% to make 6? Hmmm… what’s wrong with that picture?