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Investing May Be As Simple As Paying Down Your Debt

Aug 17, 2007
If you have begun to research investing, then it is a sign that you are interested in taking full responsibility for your financial state in general. The first step in doing so is to examine your financial status in four different categories: income, expenses, assets, and liabilities.

Income and expenses are pretty straightforward. Income is the money that is coming into your account, and expenses are the money that is going out. If you are responsibly budgeting, then you have more income than expenses, allowing you to invest the excess. However, many of us in this day and age are living beyond our means, using credit as a way of making up the difference between what we spend and what we earn. For many people, this means that investing is difficult due to irresponsible spending habits.

Assets are those items or funds that you own. These could be funds that you have invested, or property that you own. You should be aware that some assets are actually likely to depreciate in value, such as cars. And that if you are making payments on your car, you will not get all of that money back if you were to sell it. However, your home is hopefully an asset that is appreciating, or growing in value. In this case, you can count the equity in your home as an asset. In contrast, liabilities are those amounts that you owe, including the debt that you have. The total of your assets, minus the total amount of liabilities that you owe, gives you a picture of your net worth. For many of us, it is shocking to realize that our net worth may actually be a negative number, simply due to the amount of financial liabilities that we have incurred.

So one of the easiest ways to invest, at least if you are just beginning, is to simply invest in your financial health by paying off your debt. For example, start by looking at the bills that you are paying on a monthly basis. Are any of them credit cards of payment plans of some kind? What are the percentage rates that you are paying on those debts? If you were to sit down and calculate the total amount of interest that you are paying in a month, you may be shocked to learn the amount of money that you are actually throwing away by carrying that debt. To stop throwing that money away, concentrate on paying down the debt.

While making minimum payments is the requirement of the credit company, it is also their way of keeping your account open by encouraging you to pay a smaller amount than you could. The longer you carry a balance, the more money that they make. So start by identifying which accounts have the highest interest rates (or have the largest balances and so are costing your more in finance charges), and pay as much as possible on that account while continuing to pay the minimum amount on your other accounts. When you have paid off that debt, move to the account with the next highest interest rate and do the same. Eventually, you will have decreased your liabilities greatly, and can then focus on investing in ways that will add to your assets as well.
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