How Can I Use My Investment Income to Pay Off Debt?


There really aren’t any special types of investing accounts or tax advantages.  It is just a matter of using investments to increase your income, and therefore have a larger shovel with which to clean up your debt.  Realize that stocks are a long-term investment — one cannot expect to get any particular return in any given year.  Bonds give a more predictable return, but that return is less than that of stocks over long periods of time.  Given how low interest rates currently are, it would be difficult to find bonds that are paying more than the 7% you reference without taking a lot of risk.  (Note you should also be able to get the home mortgage down below 5%, which would help some.)  Given this, there are some different ways to attack your debt.

1.  The Dave Ramsey method would be to pay the minimums on everything but the smallest debt.  Then, use all of your additional resources to attack that debt.  Once that one is gone, use the additional money you have from not paying interest and payments on the first one to attack the next biggest.  Go up the line this way.  Given that you have some savings already, it would make sense to keep an emergency fund (enough for 3-6 months of expenses) and apply the rest towards the debt. 

To make this work, it would help to cut your lifestyle back while you’re working to pay off debt.  For example, sell cars with big payments and get a cheap, paid-off car.  Avoid eating out.  Consider a second job delivering pizzas, bartending, or something similar – this is all extra cash that could go right towards the debt.  The more intensely you can attack the debt the faster it will be paid off and out of your life.

This method has the advantage of eliminating debts and therefore the interest payments as you go.  Also, you get the motivation of seeing your shovel – the amount of money you can pay each month – grow with each debt you slay.  The disadvantage is that if you hit some big misfortune, like losing a job and having trouble finding another one, you only have 3-6 month’s worth of cash as a cushion.

2.  A second method would be to pay the minimums, keep 3-6 month’s worth of expenses in cash, and put any extra towards investments (index funds or ETFs would be appropriate to lower risk).  Expect that the value will change daily, with rallys and drops in value.  Each time the investments equal the value of one of the debts, pay it off.  Then start putting the payment you were making toward that debt into investments. 

Because stocks fluctuate in price you will have some times when stocks rally and you’ll be able to retire debts quickly.  Other times the stocks will fall in price for  a while and you will just be paying the minimums for a while waiting for the stocks to recover.  The good news is that stocks rarely stay down for long, and because you’re investing regularly, you’ll be in even better shape than breaking even when they return to their former prices. 

The advantage of this method is that the investments will provide additional income that can be used to help retire the debt, albeit it at unpredictable times. You’ll also have some additional cushion from the investments should misfortune befall you, e.g., a job loss.   The disadvantage is that you’re taking a risk of taking even longer to pay off your debts if stocks drop substantially.  This risk decreases if the debt is large and will take a long time to pay anyway (for example, a house with a 30-year loan) since then you’d then be investing for a longer period of time, greatly increasing the chances of a good return.   Also note for very large debts (like a house), it would be worth it to sell some stocks and pay large portions of the debt after good years in the stock market (+25% returns or more) even if you can’t pay the whole debt since risk increases when the stock market goes up sharply. 

If it will take at least 10 years to pay off the debt, the second method might be a good strategy.  If you could work intensely and knock out the debts in a year or two, the first method would be more appropriate since a sudden drop in the stock market could occur and take a year or two to return to former levels, increasing the time it takes to pay off the debts.  In both cases, finding ways to increase your income and reduce your other monthly expenses will speed things along.

Note that which ever way you use, once the debts are gone try to take some of the money you were using in payments and begin to invest regularly.  If you avoid letting your expenses build up and consume all of your income, you can build a great portfolio that will greatly augment your income in 10-20 years.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Getting Rich through Stock Picking


It is often said that no one can beat the market, and yet individual investors do it all of the time.  No it is not the guy who is always talking about the market and his trades.  You know, the guy who is always checking his blackberry for stock quotes and telling about his victories and war stories.  It is the one who quietly builds up large positions in companies and holds onto them as they grow.

Growing wealthy through stock picking is very similar to growing wealthy by starting your own company.  When starting a company one chooses an idea, finds some starting money, and then works hard to make the business grow.  Often substantially all of one’s money is in the business.  With a lot of hard work, some good management of finances and payrolls, a good idea and a bit of luck, one can become wealthy through one’s business.

Growing wealthy through stock ownership is a similar process, except the hard work is eliminated – traded, actually, for loss of control over the company.  Luckily, however, you can take advantage of professional managers with graduate degrees from ivy league universities – the type of management team you would never be able to hire on your own.  The trick is to think like you are becoming a partner in a business rather than trading stocks.

When one trades stocks one is generally concerned with price movements.  If the stock is moving up in price, one will hold on, perhaps taking a bit of profit by selling a few shares on the way up.  When the stock appears to be peaking, one will sell to lock in the profit before the price retreats.  Often this results in one selling out of profitable positions too soon or even buying stocks near peaks and selling them after sharp sell-offs.  This is an exciting way to invest, but generally it will result in little profit.  If one is lucky one will tie the market.  In general, however, the additional tax and trading cost burden of moving in-and-out of the markets will result in substantially lower returns.

When one buys like a partner, one is taking a long-term stake in the company.  The price really doesn’t matter much, as long as it is not too great when buying in to make the profit potential unappealing.  One expects the price of the stock – the sale price of the business – to fluctuate with time.  One does not care so long as the business is growing and prospects for it becoming more valuable in the future remain bright.

One also looks at the company differently.  Rather than charting price movements, one looks at the business.  How profitable is the business line?  Who are the competitors?  Does the company have a unique market advantage?  How much room remains for growth?  How talented is the management team and how invested are they in the company’s success?   If held for a long time, what will be the return (dividends) of the company?  Is there a better place to put one’s money?  Is the debt level manageable (no debt often points to a well-run company that has a lot of ability to take advantage of opportunities).

Investing in businesses, one would also tend to concentrate holdings more than one would when trading stocks.  Advisors often recommend holding many, many different companies for diversification, which protects against volatility in individual stocks.  If one were buying into businesses, however, one wouldn’t put money into every place on the block.  One would be very selective and just pick a few businesses (more than just one because things do happen). 

The added level of screening helps to guard against picking the bad companies, allowing one to concentrate more than is generally recommended (although one should never put more into an individual stock than one is willing to lose).  As one does well and the value of one’s portfolio grows, one would invest in more businesses, just as someone buying real estate would buy more properties as finances expand.

It is possible to become wealthy investing in stocks.  It requires that one thinks like a partner and invests in bussinesses, however, rather than trading stocks.  One needs to raise enough money to make substantial investments and one needs to have a long-term outlook.

To ask a question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Avoiding Student Loans


If you think about it, it is truly amazing that so many people “need” student loans to go to college.  I could understand it if one didn’t know about attending college until a few years before, but there are 18 years between the time that a child is born and he/she will be of college age.  Even if the child decides not to attend, it would make sense for any parent who expects to have a college bound student to start putting money away about the time the child is born.  After all, the cost of tuition and room and board approaches the cost of a new home, so starting early is the only way one would have a chance of saving enough.

And yet many (probably most) people get to college with little money saved.  While the average person would tell you that everyone gets college loans, the average person is broke and therefore we should stop listening to him.  The fact is unless one becomes a doctor or a lawyer and can command a very large salary (and keep eating Raman noodles for a few years until the loans are paid off), the burden of college loans will be extremely detrimental to your financial plans. 

This is because time is the most powerful lever when accumulating wealth.  The earlier you start to invest and save, the less you actually need to invest and save.  Someone who puts money away between 20 and 40 will make far more than someone who puts money away between 40 and 60.  But with the modest income most have coming out of college, paying off those student loans will take away any free money that is available.  Just when those loans are paid off, it will be time to take out loans for your kids to go to college.  It is much better if you can avoid getting them in the first place.

Here are some ways to avoid college loans:

1.  Choose a cheaper school.  Yes, Harvard sounds more impressive than Big State University at the bars, but the fact is unless you are trying to become partner is a prestigious law firm, few employers will care about where you went to school.  They will care about what you learned while you were there. 

Your parents’ tax dollars, and later your tax dollars already went to the state universities.  Going to a private school will require you pay for your education twice.  Also note that outside of the ivy league, most of the private schools really don’t even carry that much prestige.  Is it really worth an extra $20,000 per year and $100,000 in student loans when you get out to go to that small Christian college to become a minister and later secure at $30,000 per year job?

2.  Save early and save often.  The Educational IRA, at $2000 per year per child, is really a joke when compared with college costs.  Still at least saving $2000 per year is a start and may result in accounts on the order of $50,000-$70,000 when your children are ready for college – enough for tuition and some room and board at a state school.  Add a summer job and living with a few roommates, and one might be able to make it through.  These living arrangements also provide motivation for finishing quick.

Money can also be given to the child into a UGTM account.  Be careful when doing this, however, since the money becomes the child’s when he/she turns 18.  If he wants to tour the country with his band with the money, that is his choice.  It will also be necessary to file a tax return for the child once the accounts start generating enough income.  An alternative would be to create a separate account in your name just for college savings and put regular payments into it.

3.  Scholarships.  Many people go for the big scholarships that provide a full ride.  There are many small scholarships that are less competitive, say $500-$1000 each.  While this may seem like very little and not worth the effort, spending the summer applying for scholarships can be more profitable than a job at the ice cream shop.  Pull together 50 of these scholarships together with some savings and one can come out with a full ride.

WIth a little hard work, a little sacrifice, and a little planning, it is possible to get through school without being saddled with student loans.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

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