Should I pay off credit cards or invest?

I’m here to help you decide. In fact, I’m happy to make your money resolution for you!!

Now, I know what you’re thinking, “but Dumpster Dog we are all so different, however will you make a one-size-fits-all resolution?” Sure, sure, we are all special snowflakes. But even special snowflakes gotta clip their toenails and pay the bills, ya know? If you’re new to financial planning, some money priorities should be universal. Especially if your goal is to build wealth. Which, hopefully, it is.

I know that “building wealth” sounds kinda intimidating and out of touch with how our generation thinks. So, before we dive in, let me clear up any confusion! When I talk about “wealth,” I’m not talking about $5,000 purses or marble countertops or stupid shit that doesn’t make us happier.

When I say “building wealth,” I’m actually talking about freedom. I am talking about putting ourselves in positions where we won’t have to work forever. I am talking about traveling at age 65, and not working as a door greeter at Wal-Mart because our outdated skill sets can’t get jobs anywhere else. I’ll say it again: WEALTH = MONEY = FREEDOM. Sometimes, it helps to reframe—from now on, think of “building wealth” as “building freedom.”

If money resolutions should help build financial freedom, then the majority of young people are doing it wrong. Hell, I haven’t always prioritized the “right” things. Even after ten years of studying money habits, I still have to rein in my own lavish tendencies. Constantly.

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When I ask a young person what their money resolution is, they almost always say one of two things:

1. Save for a vacation. I love travel with every (Brazilian) bone(r) in my body and want everyone to have the opportunity. But, unfortunately, saving for a vacation is not a financial resolution. Now, it could be a wellness resolution, which is important too. But be careful, spending is spending and you need balance.

2. Save for a down payment on a house. This can be a great resolution for many folks because at least the money ultimately becomes invested, but it’s still somewhat out of order for lots of us.

Aiight, you ready for some real talk? Here are the resolutions you should have, and yes, they ARE in a particular order.

#1 Pay off credit card debt while building up an emergency fund (aka your “Oh-Shit Stash”)

First things first: get rid of your motherfucking credit card debt. I don’t have the energy to pussyfoot around this, credit cards are bad news. It is my duty to inform you how to build wealth. And if you want to be richer, and if you ultimately want freedom, you have to stop paying interest on credit cards. Getting out of credit card debt must be priority numero uno. Before retirement saving, before home ownership. “Investing may sound hot, but you want to focus on being rich, which involves being debt free,” says money guru, Ramit Sethi, in his book, I Will Teach You To Be Rich.

The average APR (interest rate you pay on borrowed money) on a credit card is 14%, compounded daily. Some cards charge up to 25 or 30%! This, my babes, is highway robbery!

(Not historically factual.)

14%. Let’s think about that. Could you potentially invest the money instead, in a home or retirement, netting out positive?

The short answer: hell nah.

Stocks have earned about 10-11% over time, though we can likely only expect 6-7% moving forward. Home prices generally grow at about the rate of inflation (more in some cities), which has been 3-4% historically. Bonds are paying shit right now because interest rates are so low. There is literally no legal combination of investments you can make that would come anywhere CLOSE to matching what you pay in credit card interest.

No matter what you do, you are losing money if you have credit card debt. All investment combinations earn LESS than what credit cards charge.

Make getting out of credit card debt your New Year’s resolution.

While you are paying down debt, start building up an Oh-Shit Stash for emergencies. It’s hard to do both at once, but try to keep a small cash buffer—at least enough to cover your car and health insurance deductibles—on hand. Unexpected one-time costs get people in trouble (more debt). What’s the best way to do this?

#2 Automate Saving

Once the credit cards go bye-bye, the next step is automating your savings program. As investing gangster Warren Buffett said, “Do not save what is left after spending, but spend what is left after saving.” It is so easy to ignore this simple advice, but don’t.

Please listen to Warren Buffett! Warren Buffett funny,

We gotta be real with ourselves about what happens once moola hits the spending vortex that is our checking accounts. Personally, I have no self-control.  If there’s nothing in place to stop me, I’m spending full paychecks on craft supplies and hallucinogens. Get an automatic transfer of $$$ set up between your checking and savings account. Even if it’s only $25 or $50 a month, have it moved immediately after your paycheck hits (though, leave space in case payday falls on a weekend).

This way, you can begin to build up your Oh-Shit Stash. Six months’ worth of expenses is recommended, but you may want more or less given your personal situation. Considerations include: children, job security (be real with yo-self) or plans to leave a job, fallback support—family to help in an emergency? etc.

#3 Save for Retirement

Yup, saving for retirement slides into the third spot on our list.

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“Before saving for a home,” you exclaim?! “But I will need a home much sooner than retirement!” Yep! Before saving for a home, you need to have a retirement savings structure in place. Why? Well, if all goes as planned and you live for a long-ass time, your retirement is (likely) going to be more expensive than your home! (Unless you’re like, Jerry Seinfeld, whose home is worth at least 15 Dumpster Dog retirements.)

Think about it: You are going to live between the ages of 65 and 100 with no job and no income. That’s 35 years. And guess what? When you’re retired, you are going to have bills, you will want to travel and treat your aging bodies well, and you are going to need hella meds. Being old is expensive.

That, and no one else is saving for you. You’ll probably get some Social Security (government’s retirement plan), but frankly, our generation can’t bank on it. Even if we do get it, it will not be enough. Elders who live on only Social Security often live in poverty.

If you can’t afford to save for retirement before or while you save for a down payment, you should be leery about your ability to save for retirement once you own a home. Home ownership is insanely expensive. There is always something broken. Mortgages are a great way to push yourself into a required savings/investing routine, sure, but I’m here to deliver the highly unpopular message that buying a home cannot come at the expense of saving for retirement. And as we know, compound returns work best when you start as young as possible, even if it’s with small amounts.

*****Of course, there are always, always exceptions. Housing prices looking too good to pass up in the neighborhood you’re certain you want to live? That’s a good one. Feel more comfortable aggressively paying down student loans because you hate the feeling of debt? Perhaps it’s not mathematically advisable but that’s a wildly important emotional decision. Pretty sure that the only way you’d save is to put it in a hard asset, like a home? That’s coo, do you. Or apprehensive about investing because you don’t know how? Still fair (but read this and this and this).*****

Standard financial planning practice tells us to contribute at least 10% of our salaries towards retirement. Unfortunately, this might not even be enough. But no stress! Even if you can’t do 15% now, make it your goal. Start with 1% or 5%, I don’t care, but start with something! (In what type of account? Read here.)

Seriously even if it’s 1%. 1% is a great start because you’re building the habit; you know that even as you progress throughout your life and take on all sorts of financial goals (kids! a business!), saving for yourself and your freedom is not just a priority but a non-negotiable aspect of your financial plan.

Once you have credit cards, your Oh-Shit Stash, and retirement savings up and running, your framework is in place and you can start to think about the fun stuff: investing your money, vacations, homes, weddings, life upgrades, a round of tequila shots for everyone in the bar.

should i pay my credit cards or for retirement first?

Soon, we’ll talk about the tools you need along each step of the way. I just wanted to be certain that first, we’re all on the same page about a commonly-agreed upon path to building financial freedom. Of course, this is all somewhat simplified—again, I understand that life is not always so straightforward. But also, don’t make things more complicated for yourself than they need to be.

Pick one thing on your list, and work at it. Good luck, and happy New Year!