Traveling and speaking at investing seminars introduces me to a lot of investors, many of whom have the same question:
“Hey Phil Town, If I have significant debt, should I pay it off first before getting started in investing?”
Here’s what Phil Town has been telling them: One of the great advantages of being in the military a long time ago is that I don’t get too worked up about the little things that go wrong in my life now. Once you’ve been shot at, everything else seems relatively minor. So the first thing I can tell you about having too much debt is to keep it in perspective. Nobody died, we’re still healthy, we’re still in the game.
Having said that, its still hard to shake the pressure that debt puts on you. It’s like you’re on a tread mill and no matter how fast you run, you get nowhere. So to fix this we’ve got to get better training and we’ve got to do stuff different.
First some Phil Town training: I want you to read Automatic Millionaire by David Bach. Based on what you learn, make a plan and stick to it. Keep the goal in mind and in a couple of years (or maybe 5 or so, doesn’t matter) you will be both debt free and you will have money to invest. And you’ll have one more incredible gift to yourself if you follow what I tell you next.
Now to the Phil Town big question people ask after hearing me speak: Should they pay for investing tools when they’re loaded up with debt? Like the cool African in Gladiator said at the end, “Not yet, my friend, not yet.”
Usually a lot of debt means you are paying top interest rates – maybe higher than 18% a year. Remember that our target for our return on invested money is 15%. And do you remember Rule #1? Rule #1 in this case would tell you that if you are paying 18% and making 15% you are not playing by the Rule #1.
In fact, to justify borrowing for Phil Town investing, we have to apply the Margin of Safety criteria but times 2. So if our investment is likely to give us a 16% return, the most we can pay for debt is 4%. If you can borrow at 4% and invest with Rule #1 certainty then sure. But you can’t have certainty in your first investments because you are just learning. Therefore, I’d say for almost everyone who has debt problems you should pay off the credit card debt first.
Meanwhile, while you are paying off the debt, you are going to be banking the most important thing you can bank: investing experience. I would recommend this whether you have debt or not: if you are a just starting Rule#1 type investing, then I want you to paper trade $100,000 until you know you know what you are doing. It might take you 2 months. It might take you two years. But that’s okay because you are banking experience. And meanwhile, you are getting rid of the debt.
And here’s a Phil Town secret to getting rich fast: Use other people’s money. Big secret, huh?! Okay so it isn’t. The secret lies in GETTING other people’s money. And here’s the secret to that secret: Build a great track record as an investor, even by paper trading and the money will seek you out. Investors are always looking for someone to put money with who has a good track record.
So whaddya gonna do?
1) You’re going to read Bach.
2) You’re going to pay down debt.
Meanwhile you’re going to study Phil Town (on this site and then in my book) and start building a track record by paper trading. And then, in a couple of years, you’ll start with a little saved money to practice for real. Then you are going to attract investment capital (which I’ll show you how to do later) and in 10 years you are going to be a millionaire.
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