In the previous article in our #loveyourmoney series, we hinted that perhaps it was a good idea to investigate investing in the stock market; but before we do that it’s important to establish whether you are in a suitable position to take the plunge. We are talking about debt.
The mainstream media take a simplistic view about debt; that somehow debt is a universally bad thing. These commentators are wrong. How would you own a house or build up a business without borrowing?
There is an important distinction between going into debt to buy an asset, for example, taking out a mortgage to buy a property and plunging into debt to fund a holiday.
Clearly borrowing to buy a house makes sense. It would take a lifetime to save up enough money to buy a property outright at the outset. And the arithmetic behind buying a house with a mortgage is seductive.
Say you buy a £100,000 flat with a £10,000 cash deposit and a £90,000 mortgage; and in a year’s time the flat rises 10% in value to £110,000; your wealth will double from £10,000 to £20,000.
But not all debt works in your favour. Going into debt on your credit card to fund a holiday for example can have disastrous consequences. The arithmetic behind personal debt is horrifying. A £5,000 debt with a 20% APR, with annual repayments over 8 years will cost you over £5,400 in interest alone!
You can run up debt on your credit card without even noticing it. Women in their 50s have an average credit card debt of just under £1,000. But this average figure covers a multitude of sins. Some may have debts running into five figures while others treat credit cards like a charge card; always settling their monthly statement and never paying a penny in interest. This is sensible.
The take away from this is that if you have credit card debts pay these off first before you consider investing in the stock market. If your APR is 20% your spare cash is better spent paying this off as it is unlikely that your stock market investment will generate a 20% annual return.
Once you have cleared your debts (other than your mortgage) you are in a position to invest in shares.
Part 1 – Are you Scared of the Stock Market?
Part 2 – Making Your Money Work for You
Part 3 – A Brief Guide to the Two Faces of Debt
Part 4 – Are you Ready for the Stock Market?
Part 5 – Three-Point Plan for the Investors New to the Stock Market
Part 6 – Should I Consolidate my Pensions?