But if you save more of what you make, it is easier to meet investing goals since more assets are at work. Those who save relatively smaller portions of their income are more easily tempted by speculative impulses that make intelligent investing more difficult.
Everyone with income faces the question of income allocation. You have to decide how much of your income to allocate to housing costs, food and clothing, entertainment, transportation, education, and so on. Some people also have the unfortunate chore of deciding how to allocate income to pay for past consumption in the form of cumulated credit card debt, automobile or personal loans, and mortgages on real estate.
It should be a no-brainer that the high-interest-expense items in this category should be paid down to zero before an allocator even thinks about investing in common stocks. If you are carrying a balance on your credit card accounts that requires you to pay something like 10 to 18% interest annually, you are wasting your money. Pay those debts down to zero and you will automatically earn the rate you otherwise would be paying—guaranteed (something that is never possible with stocks).
The same holds true even for less expensive obligations such as automobile loans (with average interest rates of around 8 to 12%): Paying them down to zero with your extra cash guarantees you that return. It can even be true for home mortgage loans in some cases: Paying down 6 to 8% debt locks in that rate in a way that no common stockcan ever guarantee.
Read More : Income Allocation
