You want to pay down your debt, but your income has been about the same amount for the past two years. Ideally, you’d like to redesign your website, hire an employee to assist you at your business, buy a MacBook Pro, and begin establishing a social media presence. But your credit cards and any other outside debt are killin’ you. Much of this may be linked back to the fact that you could be spending around $200 a month in additional interest which could be going towards trademarking a logo design or buying some software you really need.
You feel stuck because you are not sure what to do – pay down the debt or invest in your biz? If you rack up more debt, you will just dig a bigger hole for yourself. If you make the minimum payment on your debt, you won’t chip away at reducing it. Total deer in the headlights moment.
Everyone’s financial situation is different and what I’m about to tell you is general advice, not personalized. If you had me in a headlock and gave me a noogie and said, “Justin, help! What should I do? Pay down debt or invest in my business?” My answer would be… drumroll please… to do both!
Paying down debt or investing within your business means you will have some extra cash and you have a choice. If you don’t have the extra cash, then you will need to review all of your expenses, both business and personal, and see where you can cut back without it affecting you big time.
But if the only way to pay down debt is to grow the sales of your company and not cut your expenses, then you have no choice but to make smart bets and invest in your business. Smart bets are where you have a pretty good shot at making a 3x return on your money within 3 to 12 months.
A smart bet is also investing a small amount of money that won’t break the bank. Once you test and you see if the investment pays off, then you can go bigger. And what do you do with the profits? Take the cash and pay off that debt.
Here’s what you need to know and understand:
- What’s the value of each client/customer you have? Let’s say your average client relationship is worth $1000. Would you spend $300 to make $1000? Of course! But you don’t know for sure if you will get the client. So you really need to think of the odds and what a customer is worth to you. Remember, make small bets and test.
- What’s the rate of interest you are paying on your cards? Let’s pretend it is 10% interest. Think of it this way: if you paid off your debt, you would be effectively making 10% on your money. That’s because you wouldn’t have to pay interest anymore.
- Can you lower your borrowing costs? If your rate is 10% on your credit cards, and you can take out a home equity line (HELOC) at a lower rate, that might make sense. You are lowering your borrowing costs. Most of the time, you can deduct the interest on a HELOC. Please consult with your tax advisor to make sure this is the case. Also, you should be able to lock in a rate to protect you in case interest rates rise. An additional option is to work on transferring a pre-existing balance onto another credit card. There are usually fees involved when it comes to doing this but your credit score may go down in the long run.
- You need to be aware of how you feel about debt. Are you willing to be strategic and borrow money when your gut says it makes sense? Do you feel comfortable borrowing money at 3% to try and make 5%? Or does owing people money give you the freakazoids?
Justin Krane, CFP®, CIMA® President/Principal
Justin Krane, is a Certified Financial PlannerTM professional and the President of Krane Financial Solutions. His savvy, holistic approach to financial planning allows clients to unite their money with their lives and businesses with sound financial decisions. Using a unique system developed from his studies of financial psychology, Justin partners with entrepreneurs to create a bigger vision for their business with education and financial modeling. Follow Justin on Twitter @justinkrane.