By Ryan Turbyfill, MBA Financial Advisor
As with many parts of our country, it has been very hot here in Colorado. The other day as the thermometer soared, I saw a social media post that made me laugh: “Thankfully it’s not snowing, can you imagine shoveling in this heat?”
Let’s stick with that theme and talk about a financial strategy familiar to many, especially if you follow Dave Ramsey. The idea is to pay off your smallest debt first to start a snowball rolling uphill. Then take that free monthly cash flow and pay down your next level of debt — once that is paid off, you move on to the next one. This “snowballing” method of debt reduction is simple, and it works. Paying off the smallest debt also has a psychological advantage: it gives you traction right out of the gate and provides an early sense of accomplishment.
The other “snowball” method is basic: Saving; saving money for goals like retirement, college, travel, and what we like to call Restylement. Funds put into a retirement account, brokerage account, or even a savings account, start earning interest. This is the concept of compounding: upon an initial contribution, funds start making gains. The next contribution is added and starts to grow while the previous funds are compounding as well. This is how a contribution of $1,000/month for 30 years at a 7% gain becomes over $1.1 million.
Now let’s look at invested funds. Stocks fluctuate and sometimes the snowball can fall into a deep crevasse. Unfortunately, a 50% loss in one year, followed by a 50% gain the next year doesn’t get you back to where you started. It takes a 100% gain to get you back to your original starting point. (This article from our archives covers this concept in a fascinating manner: The Tortoise and the Hare: A Study in Volatility).
At Capstone we focus on matching clients with the appropriate risk to avoid large losses and keep that snowball rolling up the hill. Going after speculative investments comes with significant risk. We saw this with many speculative tech companies and cryptocurrency last year.
What debt should I pay down first? How much should I be saving each month? How much risk is appropriate to keep the snowball going uphill? What kind of return do I need to meet my goals and feel comfortable with my finances? These are all important questions to consider. This is where the advisors at Capstone Investment Financial Group can be your guide – your trusted Sherpa on the snowy hill.
Ready to get started, or want to make some changes in your existing financial strategy? Please reach out – we are here to listen and help.