So, you’ve decided you’d like to trade and invest. Bear in mind, trading is no get rich quick scheme. Unless of course you have that drug the guy had in the movie limitless that allowed him to become a trading genius. You could take months to reach your goals. In the meantime, you may have your funds tied up for a while. This means your trading money and grocery money should be separate.
If grocery money is the only money that you have, then your obstacle to finding those investment funds could be the money you spend each month on your debts. A book called Safe Strategies for Financial Freedom[i]outlines an excellent strategy to dealing with debt.
Here is a paraphrase of what the authors suggest. Keep in mind I’m going partly from memory, since I’ve already returned this book to the library. That’s right, I still use my library card. Get one!
Let’s say you’re spending $2500 a month for the minimum monthly payments of your debts. You’re paying $1500 for your mortgage, $300 for your car, $250 for your student loan, $350 for you credit card, and $100 for your line of credit. Since you’d really like to get out of debt, you’re now going to start to pay an extra 10% per month towards these bills, bringing that $2500 to $2750 a month. (2500+10% or 250=2750)
Now you’re going to figure out which debts can be paid off in the least amount of time. To do this, look at the total balance remaining on each one, and divide that number by the minimum monthly payment. For example, you owe $300,000 on your house, and your monthly payment is $1500. Therefore, the house would take about 200 months to pay off. Your line of credit has an outstanding balance of $1000 and the minimum payment is $100 a month. This means it could be paid off in 10 months. Do this calculation for all debts, then put them in order of which will take the least to the most months to pay off. The list should look a little like this:
Line of credit $1000 @$100/mo 10 months 1st priority
Credit card $4200 @$350/mo 12 months 2nd priority
Car $3900 @$300/mo 13 months 3rd priority
….. and so on.
Next step. Start paying those bills, applying that extra 10% to the 1st bill on the list. So, instead of paying $100 a month on your line of credit, you will now pay $350 (by adding that extra $250 or 10%). Your line of credit will now be paid off in about 3 months instead of 10.
When the 1st debt is paid off, take that $350 and treat yourself for one month to celebrate this accomplishment. When that month has passed, you will again continue to use $2750 a month to pay debts.
Now, for your credit card. Instead of the $350 minimum payment, you’ll pay $700 a month, which will have the card paid off in about 6 months, not 12. Take a month and celebrate with that $700, then get back to making more payments
The car is next. You’ll be paying $1000 a month now. The car will actually be yours in about 4 months. These are fairly rough calculations. I haven’t subtracted what the minimum monthly payments would be taking away from the non-priority debts while the priority debt was being paid, but I think you should get the picture.
In the end you’ll be paying $2700 a month, rather than $1500 on your mortgage, which will now take somewhere around 109 months rather than 200 months to pay off. Again, this figure ignoring what would have been subtracted the months paid while paying other debts. Either way, it means your mortgage could be paid off in about half he time.
All of this efficiency can be gained by simply adding an extra 10% and prioritizing payments. Now the money you earn can be saved, invested and traded!