Tuesday, May 13, 2008

Why I invest

Someone questioned in the comments why I invest if I still have debt.
That's a fair question, and there are several reasons.

First, I think it's important to have an emergency fund set aside before
focusing on debt. Unplanned events happen in everyone's life and having
money that's fairly easily accessible means that you don't end up going
further in debt when they do occur. I'm probably a bit more paranoid
than most about this issue, given the experiences I've had so far, but I
have 3 months of living expenses set aside. I invest 75% of this money
in order to get a pretty good rate of return without significant risk.

Second, my debt is not increasing. It's in the hands of collection
agencies, and due to the laws in my state, they're not allowed to tack
on additional fees and interest. I have legal representation in order
to handle this in the way that will minimize the impact on my future
financial outlook. Thus, while I will eventually pay everything I owe,
it's actually not advisable for me to pay it off monthly or
immediately. I'm putting aside a fairly significant amount of money and
using that to get a decent return so that as agreements are made, I can
pay off a specific creditor and be done with it.

Finally, when the money is put in an account that I don't have immediate
access to, I'm really unlikely to spend it. Transferring the money adds
additional time for thought and reflection about any purchase I intend
to make. Anytime I have the opportunity to put money into an account
and let it passively increase, I try to take it. Even if I only put it
in an index fund in the short term, I'm comfortable with that level of
risk, and the upside is a lot more than letting it sit in my checking

So for most people, after setting aside at least $1,000 in an emergency
fund, paying off high-interest debt makes much more sense than investing.

As a side note, my using the term "consumer" debt is a bit misleading.
About 80% of this debt was never credit card debt to begin with. About
$20,000 of it was a direct result of my ending up in the hospital.
Secured loans defaulted, bills went unpaid, etc. - my parents refused to
come up (not that I would have wanted them to) and no one else had any
authority to handle my finances. Moreover, no one was really too
concerned about those, as my chances of survival at the time were small
- bills tend to take a back seat to that. So most of this debt never
had interest.


  1. Great post - thanks for explaining your debt. I can imagine that bills would take a backseat if you were fighting for your life. It sounds like you have a good plan in place... keep at it - you'll get there eventually!

  2. Yes, thanks for the post. I'm adding you to my google reader and rooting for ya!!!