Three little words. These three small words have the power to change your financial destiny if you make the choice to implement them in your life.
Invest the difference. What does that mean?
In a nutshell, it means you should be living below your means. The LBYM-lifestyle translates into always having a gap between what you earn and what you spend. Your goal is to make the difference between your earnings and you spending as big as possible while still enjoying your life from day to day. Then you’ll take that amount, ie. the difference, and you’ll invest it for the long-term. The bigger that amount, the sooner you’ll reap your investment gains. Then you’ll let those gains compound for a couple of decades. At some point, your investment gains will able to support Future You, whether wholly or in part, when you’re no longer able to send your body out to make money.
Kindly keep in mind that staying out of debt is a key part of living below your means. If you’re constantly paying money to creditors month after month after month, then you won’t have those dollars going into your investment portfolio. Also, paying creditors 29.99% when you can only reasonably expect an average return of 8%-10% over the long-term is a losing proposition for you.
Pay off your debts then start investing.
If you have debts, focus on paying them off first.
Unless you’re over 35. If you’ve hit your mid-30s, then you need to invest while you’re simultaneously paying down your debts. Yes – you’ll pay a little more interest this way, since your debts will stick around longer. In my humble opinion, that’s not your biggest concern. Once you’re solidly into your adult years, then you need to start making adult decisions. And one of those decisions is to take care of Future You by investing money for your care and feeding 30 years from today. Once you’ve hit your mid-30s, then you need your money to be working for you as soon as possible. In your case, ASAP = immediately. It doesn’t not mean “tomorrow”.
The trick will be to not go into anymore debt. Make a plan and stick to it. As your debts get whittled away, re-direct 50%-75% of your former loan payments to your investment. The rest of the former payment can be spent bulking up your emergency fund. If your emergency fund already holds 9-12 months expenses, then spend that money on the little luxuries that make your life more comfortable.
Maybe you want to enjoy a nice bottle of wine once a month? Or would you rather travel somewhere? Perhaps you finally have the money to comfortably handle the long-term financial commitment of a pet? You know what you want better than I do. My point is that you should use some of that money to add what you really want into your life.
If you need a plan for how to pay down your debts, I would suggest using the Debt Snowball method. Despite the controversies that are always swirling around the man who made them famous, this method of paying off debt is an effective and straightforward way to rid your life of creditors. Do not go into further debt while paying off your current ones. I cannot stress this enough. Staying out of debt is incredibly important to Future You’s survival and comfort.
Where should you invest your money?
In my humble and inexpert opinion, your money should first go into your Tax Free Savings Account. Then it should go into your Registered Retirement Savings Plan. Finally, you should be investing in your non-registered investment account, aka: your brokerage account.
Don’t feel bad if you can’t max out your TFSA and your RRSP right away. It literally took me years to max out my contributions. (And I treated myself to something nice when I finally accomplished this goal!) Invest as much as you can, as soon as you can. Eventually, your debts will be gone and you’ll have the funds to contribute. Stick to your knitting and you’ll accomplish this goal. Remind yourself as often as you need to that it likely won’t happen overnight.
So those are the broad strokes. Think of them as the first principles of wealth. You simply have to live below your means, stay out debt, and invest the difference. If you do that consistently for a very long time, the odds of you becoming wealthy increase dramatically.