If you’ve spent any time listening to the majority of retirement planners, then this advice may catch you off guard.
But the truth is, not everyone should be saving money in their retirement plans. In fact, there are 3 foundational things you must consider before investing money for the future. If you’re making contributions to retirement plans and you don’t have these 3 things dealt with properly, then temporarily stopping those investments is an important part of getting your finances in order.
1. Protective Expenses
The way we look at it, if you don’t have your protective expenses in place—like 6 months of emergency savings, a basic estate plan to protect yourself, etc.—then why are you putting yourself at risk by locking money up in investments?
You’d be investing in your “future” when your “now” is in jeopardy.
So before you continue investing, make sure you’ve paid your dues and have your protective expenses in place. You’ll sleep better, and be more productive knowing your foundation is secure.
2. Investing in Your Business
Another thing to look at is investing in your business if you have one, or investing to start a business if you don’t.
I spend countless hours with business owners in my role as CEO of Wealth Factory, a personal finance company for entrepreneurs. I’m also a lifelong entrepreneur myself.
So I can tell you with confidence these two truths about entrepreneurs:
First, our business, and our ability to add value to the world, is our greatest asset. Second, cash flow is king.
So if you temporarily stop contributing to your retirement accounts and invest in, as an example, equipment that increases your business’s productivity and thus your income by 20%, then you’re benefiting far more than if you invested in a retirement plan earning 5-10%.
Especially because now you have 20% more cash flow to work with from here on out.
3. Compare Your Returns
It’s time to look at your investment returns and compare them to your loan costs.
Are there any loans that are costing you more interest than you’re earning on an investment? If so, at a minimum you may want to stop contributing any more to the investment until the loan is paid off. And then you may even want to consider cashing out the investment to pay off the loan.
However, if you do this, don’t try to pay down all your loans at once. Far too often, people play whack-a-mole with their loans, paying down a bit here and a bit there each month.
Rather—and especially as a business owner who needs to free up cash flow—use a focused, deliberate approach to pay one loan off completely.
Paying extra to the least efficient loan that can be paid off the fastest will actually improve your debt to income ratio and credit score, as well as increase your cash flow.
At this point, you can qualify for lower interest rates on every other loan, and save even more money.
Remember, investing for the future is good, but not at the expense of having a solid foundation. And certainly, not when you can get a higher return on your hard-earned money by paying down your loans, or investing in your business.
Garrett Gunderson is a financial advocate to professionals. He is the CEO of Wealth Factory and the author of the New York Times, Wall Street Journal, USA Today, and Amazon bestseller Killing Sacred Cows: Overcoming the Financial Myths that are Destroying Your Prosperity. Join his Curriculum for Wealth series in order to dig deeper and uncover the comprehensive strategies surrounding cash flow and improving your bottom-line.