Once you accept that you have to start investing early in your life and focus on investing in shares, the next most important thing to do is not to get into debt. It is probably unavoidable to borrow some money from your bank to buy your first car, but instead of upgrading to a better one when the bank increases your credit facility – just don’t. Getting used to living with debt is a powerful drug and difficult to shake. Debt is expensive, especially when you are young. Interest on vehicle financing for a first-time buyer can be between 12.25% and 16.25% at current prime lending rates. It gets a bit more complicated when you buy your first property, but the same principle applies. The best investment choice will be to either keep your debt repayments steady and invest any additional monthly income from a salary increase into your investment portfolio; or repay the debt as soon as possible.
Every person’s situation will be different and it is advisable to have a chat with your financial advisor to formulate a plan, but your mindset should always be to be debt-free as soon as possible. Warren Buffett managed his spending by believing that he had a choice: spend the dollar now and get instant gratification, or invest that dollar and have two dollars a year from now. The whole idea is to be disciplined with your spending until you don’t have to do so any more. If you spend your money on something you want, but not need, you are penalized in two ways: firstly, you enforce a mindset that wasteful expenditure is okay; and secondly, you forego the opportunity to reap the benefit of compounding.
There are situations where debt is okay. If you borrow money to finance a business venture, the interest you pay can be offset against the income you earn for tax purposes. That will enable you to keep your investment portfolio intact and enhance your income capability with the new business with borrowed money. This type of debt financing is often used in property transactions where the property is financed with a bond instead of a cash purchase. The interest on the bond can be offset against the rental income, lowering the taxable income, and enjoying an increase in the value of the property over time without using your own money.
If you want to build an investment portfolio over time without having to be an expert, the three most important things are: start investing early; invest in shares; and avoid paying interest on debt by rather putting that money into your investment portfolio. If you stick to those three principles from a young age, you will become financially independent before you reach that point where you have to decide whether you have to continue working, or whether you want to continue working.