We all know that the economy is weak, that unemployment is high, that debt is exploding, that it would be much higher if all laid off workers were still looking for a job or if those that recently graduated had decided to enter the job market. We know all of that. It still hurts when we know people that are affected personally by the economic struggles. One of the top ways that I use to discuss with readers is using the mailing list. I give out a lot of information, about dividend stocks, tech/web stocks, and more. But I also ask questions and discuss with many of you. If you have not joined our mailing list, I’d love for you to give it a try, it is free. You can signup for the tech newsletter here or join the dividend focused newsletter one here:

Back to the subject though. Sometimes, I receive a few comments that are very similar and this week I did receive a few that all had a very sad reality.. Many of us would love to do the two at once but the economic uncertainty has forced us to choose….

Investing Or Paying Down Debt?

It’s sad that we even have to consider a choice between the two, it’s far from the American dream. Many readers have been hesitating between the two in recent months. Why?

-worried about their job security
-rising interest rates
-volatile stock market
-low interest rates on money balances

There is clearly a very high correlation between the economy and this debate. The better things are, the less we worry about holding debt because we are confident that:

-we can pay the debt at any point
-buying assets that rise in value is much more profitable than paying down debt

The Sad But True Reality

We have to look at facts, a large majority of Americans (Canadians, Europeans, etc) face a much grimmer future than just a few years ago.

How I Look At This Decision

There is no right or wrong answer here obviously, we are all different and can live with different levels of debt. Here are the steps that I use:

Step 1 – Find Your Current Location

As in any other journey, in order to know where to go and what steps to take, you need to know what your departure point is and in this case, that is finding out what assets and debts you currently hold. Ideally, break it down by asset and debt category and find out how much interest you are paying on your debts. That will make a critical difference in how you decide to spend any surplus.

Step 2 – Determine How Much Money You Have Available

There are many different ways to do this, using a budget is clearly one way. What you are trying to find is the monthly amount that you can afford to set aside either to invest or to pay down debts. Many would base that number off of their budget but I personally prefer looking at the past 6-12 months in order to see how much I was able or could have saved.

Step 3 – Determine Your 6, 12 and 24 Month Goals

If for example you know that you are able to set aside $500 per month, you should be able to set aside $3000 over 6 months, $6000 over 1 year and $12,000 over 1 year. Look at your current investments and debts and determine for each of those how much you would like to contribute to each one.

Step 4 – Investments Split In 2

I think there are 2 types of investments that you can start off with:

#1-Emergency fund – Safe investing, to reduce stressful moments and give you some flexibility if something goes wrong
#2-Longer Term Investing – retirement, dividend investing, etc

How much you should hold in emergency funds really depends on you. Some say that you should have a few weeks while others want to have enough to live off of for one year. I personally like to have a few months but will increase it very slightly every year.

Step 5 – Setup Automatic Payments

No matter if it’s debt or investments, you can always contact your bank to make those payments automatic which for most people (including myself) makes it easier to contribute. Paying yourself first is a commonly used theory and I’m personally a believer. The odds of me paying $500 into my investing account the day that I get my pay are greater than waiting at the end of the month to see if I have a surplus.

Step 6 – Adjust And Restart

This is a never ending process. As time goes by, circumstances change, your job might become more or less fragile, you might be willing to put on more or less debt or see great investment opportunities. You can (and should) obviously adjust all of these over time. That being said, those with a specific plan of action will generally do much much better than those that don’t. Set up a plan, stick to it and adjust over time, you will be much better off.

It Doesn’t Get Any Easier

I wish I could say that at some point it becomes easier to decide between the two but it doesn’t. However, over time, I think we can all get a much better feeling over what the right proportions should be for each of us and get closer to the “ideal weights”.

How about you? How do you decide between putting that extra money in investments or paying down debts?

Today I was reviewing some of the news from the NY Times and it got me a bit depressed. Chances are that if you did, you are feeling the same way. It’s one thing for the Times to break down why Apple’s iPhone is being made in China rather than the US but more depressing are the reasons why and what it means. Hint.. iPhone production is not coming back to the US anytime soon, so are all of those lost jobs from the last couple of decades. It’s a well written article that explains why iPhones and all kinds of other products are no longer being built in the US which will certainly make the economic recovery much more challenging.

Is This Where It Gets Better?

I wish I could say that a slow recovery is the only thing to be concerned about but you probably would not believe me even if I did. However, there is one chart that is even more depressing, the explosion of debt per capita of the US government. I will talk about Americans in this piece just because using a concrete example  is much easier. That being said, don’t feel better if you are not American. Believe me, chances are that your country’s government is in much worse shape and if you are in Europe… well, I’m glad to see that things are holding up…for now.

So let’s get this straight. In 1975, the average US citizen had $44,762 of annual household income with a share of the US national debt equivalent to $20,564. That was probably a bit high but certainly could be managed. With a strong economy, fiscal discipline would probably help curve things back. After some heavy spending, and then the elimination of federal deficits by Bill Clinton came George W Bush and Barack Obama who both spended much more than they should have… the result?

In 2011, the annual household income is $50,876 while the share of debt exploded to $84,793!!! So income increased by 13.66% and debt by 312%? Are things about to change? Not exactly. Not only is the cost of this debt (interest) rising but expenses both in the short, medium and long term are all expected to rise. There does not seem to be anyone who can or even wants to seriously address these issues.

Why You Should Care

It’s so easy to always kick the can down the road, forget about the national debt and act as if it was a problem to be dealt with at some point in the future rather than today. I implore you to avoid thinking like that. Unless you are retired, have no kids, and do not depend on your government for any type of income, you are wrong. The fiscal problems will have major impacts:

-Broken Promises: The government has made promises regarding pensions, health care, etc. Those are looking increasingly impossible to fulfill and the longer we wait to fix those programs, the worse it will be when we do have to change.

-Rising Debt Costs: At some point, interest rates for the US government will start to rise, as has been the case in much of Europe. When that happens, not only will rates also increase for businesses and individuals but it will increase expenses for the government, will slow the economy, etc. Believe me, nothing good will come out of this.

-Depend On Foreigners: We keep complaining about our energy dependance to middle east countries, to the billions of dollars that we send to buy oil. But by letting our debt explode, we are making ourselves increasingly dependant on investments by the Chinese and others to help us sustain our current spending. At some point we will need to stop and the earlier, the better.

How We Can Reverse Things

It’s easy to simply say that we should vote for one party or another. That is far from being enough. I think it’s easy to convince ourselves that we cannot change much but there is actually a lot that can be done.

-Make Yourself Independent: Start investing early, do not count on corporate or government pensions as you will not know for a very long time if those will truly make it to you. Governments around the world will need to break many promises in the next couple of decades in order to survive. You do not want to depend on the government keeping its word.

-Invest Carefully: There are many different things that can be done in order to give yourself a good shot. I wrote about investing when your country is going bankrupt and I stand by that, prepare yourself for the worse and you might be surprised if things are not as bad as you feared.

-Get Involved In Politics: I do not mean running for any type of office or even giving your time. What I do mean is forming an opinion about the issues, how to improve things like the economy, our education system and our fiscal position. Those are critical and it’s not enough to vote for a part and hope for the best.

What Are Your Thoughts? Do You Care About Your Exploding Debt?

I mean we fight hard to save a few thousand bucks only to see the government spend that and much more. What do you think? Think that the 2012 elections will help in any way?