Before going into part 2, let's summarize quickly what I wrote in part 1 of this series; if you have some extra money at the end of the month, I argue that the first priority is health - yours and that of your loved ones. If you're all good in this department, the second best thing that you can invest in is an emergency fund.
"What do I do if I have other debt, except mortage/rent? Should I still direct the extra money to the emergency fund or should I pay back the debt quicker?"
That's a very good question. Here's my take on this scenario. If this other debt has a relative small interest rate (e.g. APR - annual percentage rate - of around 5%) I'd argue that you should allocate some of your extra monthly money to your emergency fund and some to repaying your debt faster. Something like a 50% towards the emergency fund and 50% to repaying the debt. However, please consider that nobody can give you an exact percentage of the ideal distribution in this scenario.
I strongly believe that you should always have an emergency fund. Regardless if it's one or two month's worth of expenses, this fund may be the difference between you being able to handle a difficult situation or having to go into more debt at a terrible rate (an APR - annual percentage rate - of 20% or more).
Now, if this extra debt is, for example, credit card debt or some other debt that has a big APR (anything above a 15%), I argue that the distribution of the extra money should be more towards repaying the debt, since the interest rate is high. Again, nobody can tell you exactly what percentage is best - some people argue that with high interest debt, you should try to get rid of it as soon as possible; to some extent I agree, however, should anything bad happen during this time and you have a total of 0$ for handling it ... well, that's not ideal, to say the least. If I really had to give some percentage I'd say that 80% should go towards repaying the high interest debt and 20% should go to the emergency fund.
Moving on, let's consider that you are debt free, you and your loved ones are in good health and you have an emergency fund that you are happy with. Is this the time to buy that luxury car you wanted as a kid? Or should you start investing?
This is something that is very subjective. Why? Well, because there is no investment that is 100% guaranteed to make you money.
"That's BS - what about state/government bonds? Aren't those guaranteed?"
Well, yes, but what happens if said country defaults on its debts?
"Can that happen?!"
Oh yeah - it can - see this article for some examples.
I know, the chance of a sovereign default is relative small, but the point I wanted to make is that not even state bonds are 100% guaranteed.
Also, the main point to remember is that investing HAS RISKS! And that's why I said above that it's a very subjective matter.
One person can have quite an "appetite" when it comes to risking their money. Another person can be quite "conservative" when it comes to investment risks. We also have another person who doesn't want to risk a dime and wants to save their extra money for another two months in order to buy their dream car.
Can you judge any of the above? I mean, really ... can you judge what Alice or Bob do with their money? At the end of the day, it's THEIR MONEY!
"The person who wants to buy a new car is an idiot! Investment is always the right answer!"
What if I told you that the person who wants to save for two more months to buy their dream car, has only 1 year left to live. It doesn't seem like an idiotic thing to do now, does it?
Given the fact that nobody knows, with absolute certainty, if they are going to wake up tomorrow morning, this brings us back to something I said in the first part of this series - "Money comes and goes; time is LIMITED."
With this in mind, I argue that if you are in your 20's or 30's, in good health, living in a country that's not at war or in danger of natural disasters, chances are that you are going to wake up tomorrow morning; in other words you can assume, with a relatively high chance, that you are going to be around for the next 5 to 10 years.
This could be the timeline for your invenstment plan. For example, starting now, you invest in X and you will continue to do so for the next 5 years; then, you cash out, and, hopefully, your profits will be very generous and you can retire 10 years earlier than expected.
In the next part of this series we'll dive deep into different types of investment and the corresponding risks.
For now, I'll conclude this part with the following - between buying something now, that's not a necessity, and investing for the future, it's usually the better choice to invest your extra money! However, I will not judge anyone who wants to live their life without ever risking their money and just saving it and buying stuff when they can afford it. We only have this life and our time is limited. Use it wisely!
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