Excessive debt can reduce our quality of life. Being debt-free (or as close to it as possible) would be deliberating! Importantly, being over-reliant on debt will be a real drag on wealth creation. Here are some tips to help pay off your debt and to encourage wealth creation.
How to pay off your debt
Make a list of your debt. Generally, you should pay off your higher interest debt like credit cards first. If you’re not paying off your credit cards every month, you should do so if you can switch to lower-cost debt like a personal line of credit. Some people are also making monthly payments to pay off their homes and cars.
Whenever possible, you should pay more than the minimum amount for the debt you owe so as to pay off at least some of the principal on top of the interest. It would certainly help to make a budget so that you’re spending less than you make to pay off your debt. It might also help to set a timeline for your repayment. And if you happen to get a financial windfall, use it to pay off your debt first.
If you need to, reach out for help from a debt-restructuring professional. When your debt becomes manageable, you can start considering investing to get rich. If you feel more comfortable with less debt, you can wait until you pay off all your debt (other than maybe the mortgage and auto loan) before you start investing.
Get rich by investing
Other than real estate investing, a popular way to get rich is through stock investing. Here’s how to take a long-term approach to stock investing. The idea is to buy wonderful businesses when their stocks are trading at good valuations.
You might bank with Bank of Montreal (TSX:BMO) and wish to invest in the bank, as you heard that it has paid dividends for a long time. Indeed, this year marks BMO’s 194th year of paying dividends! For your reference, its 10-year dividend-growth streak is 6.8%.
Everyone knows the big Canadian bank stock is a solid, stable investment that can deliver decent long-term returns. However, if you’re able to buy it on dips, you can drive higher returns. During times of higher economic uncertainty, such as in a recession, bank earnings fall, as does the stock. That’s the time to load up for long-term wealth creation.
For example, in the last year, in a higher interest rate environment, the bank increased its loan-loss provisions, which weighed on earnings. As recent as October, the stock fell to as low as approximately $103. It has bounced back close to 28% since!
Even if you didn’t catch the bottom (as most investors don’t) and bought shares at $110, you would still be close to 20% wealthier on the position. Plus, let’s not forget the dividend. At $110, your yield on cost would be almost 5.5%. And you can count on BMO to increase its dividend over time.
Over the last 10 years, BMO stock delivered total returns of about 10.9% per year. Let’s assume 20-year total returns of 10%. A $10,000 investment would turn into $67,275 in 20 years. If you invested $10,000 every year for 20 years for the same 10% annual return, you would arrive at $640,024.99. Now, that would be a decent nest egg. Just remember to diversify your hard-earned money across a group of wonderful businesses.
