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What is Baby Step 2? It is the second step to financial freedom, as written by Dave Ramsey. In this step, you prioritize debt payoff and cut your spending, investing, etc…to nearly 0. However, there are some nuances to it that he does not adhere to, particularly that it does not work for everyone.
1. Compounding. According to Einstein (maybe), compounding interest is the 8th wonder of the world, he who does not understand it, pays it. Whether or not he actually said that is a discussion for another time. However, the sentiment is true. If you being to invest and save your money from a younger age, it will allow it to grow while you’re paying down your debt. Now, you might be saying, “the interest on my debt is higher than what I would earn in a savings account/brokerage account.” This is a fair statement.
There are so many things to consider in the infographic above, however, if considered in simple terms. Joe would win the race.
2. Employer 401K match. If you are one of the lucky Americans who have an employer that will match your own contributions then I really recommend that you take advantage of it. It is quite literally free money. It is better to take advantage of that and at least only contribute for the match, it means less of your own money and time that you will have to contribute later.
3. Investing through a brokerage. There are so many options of roboadvisors and applications in present day. It makes it so easy for anyone to get started. I know many Millennials are skeptical, especially since the last recession is still affecting many of us. However, it is time to take the bull by the horns (pun intended). I have tried out several of these applications and the one I like the most, so far is Robinhood. There are no additional fees aside from the stock exchange fee which is minuscule but there are no purchasing, sale, or monthly fees. Using the hyperlink above to open an account gives both of us a free stock. So far I have gotten Groupon and Siri but others have received Apple, Facebook, etc. Worth a try!
I really believe that investing during Baby Step 2 really is necessary and not doing so is hurting your future self in the long run. However, this really has to do with the mathematics, if your interest is higher than the average stock market return it is better to somewhat prioritize paying it off. If is lower than allowing some room for investment would be ideal.