First Person: My 'Reverse Investing' Strategy

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Sometimes people get so fixated on putting money away in standard investments that they fail to look at other options, options that might be consider slightly "outside the box". While these other options might be quite normal and not take much in financial knowledge to undertake, they just aren't as highly publicized as certain stock market-based investments.

Our family has practiced a particular investment option I like to call "reverse investing", which has helped us to make use of our money, but in a way that may not exactly conform to standard expectations.

What is reverse investing?

So what exactly is reverse investing? Well, to me, it's getting rid of that nasty thing called "debt" before putting money into other interest or dividend earning investments. Instead of giving that hard-earned money to creditors in the form of interest paid to them, you're using money that you might invest elsewhere to pay off debt that would otherwise cost you more money.

Things like student loans, a home mortgage or equity line of credit, credit card debt, and really just about any type of debt with an associated interest rate is fair game when it comes to reverse investing. You're just using the interest rate on debt to making reserve investing decisions rather than the interest rate on savings to make investment decisions.

How to tackle debt

There are several issues involved in deciding how to tackle the various amounts that could comprise outstanding debt. These factors may include:

  • · Associated interest rates
  • · Amounts
  • · Are there associated tax benefits of the debt (e.g. mortgage interest deduction)?
  • · Is there a special introductory rate or deferral period for the debt?
  • · Are there investing opportunities that offer a better rate of return than you would get by paying off debt faster?

Typically, an associated interest rate can dictate which loan would be paid off ahead of another. Common sense would tend to lean toward paying off a loan with a higher interest rate ahead of a lower interest rate debt. But considering things like whether the rate on the debt is so low that more money might be made investing that money elsewhere might also come into play. And knocking a few low-balance debts off the payoff page, even if their interest rates are lower than certain other high-balance debts, can be invigorating and motivate you to tackle those larger debts.

Looking at investing in a different light

Sometimes it takes looking at investing in a slightly different light in order to make it better fit a particular financial situation. As a young man fresh out of college, I had little money to invest, but I certainly had debt in the form of student loans. Instead of hanging my head and getting down about those thousands of dollars of debt, I looked at them as an opportunity. I realized that the quicker I could pay them off, the less I would pay in interest over time. Instead of someone paying me to use my money in an investment, I was in essence eliminating the need to pay someone else extra money for the use of theirs. I knew that the quicker I could rid myself of that debt, the quicker I could take advantage of putting the money I was using for debt toward investments.

This was a real incentive to reverse my investing strategy temporarily to rid myself of debt so that I could take the investing world on with lesser financial responsibility to others and less stress as well.

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Disclaimer:

The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

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