Investor or Debtor: Which One Are You?

by Jon Dulin

investor or debtorI recently read a guest post over at Get Rich Slowly from William over at DropDeadMoney. To summarize, William says we choose what we are: an investor or debtor. An investor is a person that invests their money into assets and those assets produce an income on which you live. A debtor is a person that spends their money on goods (and usually needs to take a loan out to buy them or buys on credit), and then owes money to others, therefore having to work to pay the bills. In essence, an investor can choose to work whereas a debtor has to work.

Investor or Debtor Example

The great example used is the typical debtor with a car payment. This person will make payments for a period of time, say five years, and once the car is paid off, has no idea what to do with the “extra” money now that they no longer have a car payment. An investor in this situation will invest this money in assets so that their money compounds upon itself and grows to be something that he can live off of in the future. A debtor on the other hand will not know what to do with this “extra” income and as a result, he goes out and buys another car, saddling him with payments again for five more years. This cycle will then repeat itself in another five years.

My Take

While I think that the post by William is excellent and agree people are either an investor or debtor, I want to expand on it just a bit. I feel that the majority of people out there are debtors. As a result, this mentality skews itself in advice people give. Take for instance a situation I am in. I have two cars. One just died on me and I am getting rid of it. The other car is a sports car and gets poor gas mileage (and requires premium gas), has very limited storage space, just crossed 100,000 miles and has a high insurance premium because many young drivers like the car and they are risky to insure.

While the car is safe; it has all-wheel drive and good ratings in crash tests, I plan on starting a family in the near future and want a car that has a little more room and gets better gas mileage (read: more practical). The problem is that the cars I am looking at all cost around $30,000.

This price might not seem like much to some, but to me, it is a lot. Many might look at the $30,000 as buying reliable transportation and that a monthly payment of $400 is the price you have to pay. I on the hand, look at what I could do with $30,000 if I invested it. In seven years at 7% interest I would double my money. It’s just a different way of looking at the situation. I am looking at this situation through the eyes of an investor.

Find A Healthy Balance

I feel that to be happiest, we need to find a happy balance between saving for our futures and still living life today. But that doesn’t mean we should saddle ourselves with debt. The key is to not give in to the instant gratification that so many in our society have become accustomed to lately. We need to remind ourselves that it is OK to wait.

Holding off on a new car for a few years isn’t the end of the world while we build up a larger down payment for it. After all, if you have a perfectly fine running car, you have no need for a new one anyways.

The same logic applies to new clothes and electronics. If you have good clothes now, you really don’t need that new pair of jeans. If you simply hold off for a week or two, chances are the urge to buy the jeans will have passed, saving yourself money.

Start Investing

What helps me be an investor versus a debtor is simply investing my money. I know that many have had bad experiences with investing, as have I. I lost everything during the dot com boom of 2000. But I learned my lesson. Yes, I lost some money in 2008 but I stuck with it, and now I have more than I did before the crash.

In order to be successful, you have to keep your eye on the long-term. Don’t check the value of your investments every day and especially not after a bad day. My trick is to only look after the market shoots up over 100 points. Regardless if my overall return is down or not, my mind focuses on the fact that for today, I made a few hundred dollars. That keeps me going.

If you are new to investing, I suggest you try out Betterment. You invest your money in a well-diversified portfolio based on your risk tolerance. There really is no better deal out there. From there, you should create a free account with Personal Capital to track your net worth. Seeing your net worth steadily increase also motivates me. (You can also track your net worth manually too if you so choose.) The great thing about Personal Capital is that they will even analyze the fees you are paying in your portfolio and 401(k) and offer suggestions to help reduce those so you keep more of your money.

Final Thoughts

As I mentioned previously, living for today while still investing for tomorrow is not an either or. You just need to find a healthy balance that works for you. The key is that when you do live for today, you live within your means and not go into debt. If you can do this, you will no longer question whether you are an investor or debtor, you will be an investor.

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{ 8 comments… read them below or add one }

Jason @ WSL November 19, 2012 at 10:38 am

I’d definitely opt for the cheaper car. My wife and I actually just went through this scenario last week; I wanted to buy a car that would work for the next 10 years…and after doing some thinking we realized our lives may look a lot different in 3-4 years as we might be having children. Saying that, I thought a SUV would work best as it could give my wife some safety in the winter and be plenty big enough if/when we were to have kids. However, looking at the prices of decent SUVs completely changed my mind. We would have had to spend $20k and get a loan; instead, we opted for a ’05 Accord with 100,000 miles on it (for $8,000). I’m all about avoiding debt and payments. Early retirement here I come!

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moneysma November 19, 2012 at 12:32 pm

Thanks for your input. I plan on having kids soon, but my SO is looking at getting an SUV, so that could be used to haul the little one’s around. I guess that means I should start looking at 2-seater sports cars haha!! Seriously though, I guess I don’t have I find something that fits every “need” for an uncertain future.

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Veronica @ Pelican on Money November 19, 2012 at 6:31 pm

I would examine my needs vs. wants. What’s important to you? Is safety a top priority? Is it the look? You may have to make sacrifices if you are the type that thinks about what can be saved now and invested right away vs. spent right away. Once you can separate the needs from wants, your options for what’s available and what’s affordable should open up very nicely.
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moneysma November 20, 2012 at 9:52 pm

Great point….I’ll have to think about this some more….

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Holly@ClubThrifty November 20, 2012 at 7:28 am

I loved that post at Get Rich Slowly….and I agree with it. Being a debtor or investor is totally a mentality. I would buy a cheap used car. They are truly a waste of money. Do yourself a favor and do not rationalize buying an expensive car. You might as ell shred thousands of dollars in a papershredder.
Holly@ClubThrifty recently posted..What Would You Do For Money…If You Had To?My Profile

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moneysma November 20, 2012 at 9:51 pm

Hahaha….that is how I am feeling inside!

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Jennifer Lynn @ Broke-Ass Mommy November 20, 2012 at 11:51 am

A few thoughts, but please bare in mind that cars are not important to me.

I would willingly drive a clunker in order to minimize the financial dent of investing into a depreciating asset. Firstly I would check gently used cars at auction and not buy new. If I were really serious about hyper-accelerating my retirement, I may even consider foregoing a vehicle and working around bicycling and public transportation. Given a choice between being strapped down with a $20,000 or $30,000 loan, I would choose the lesser debt load. Cars may be more significant to you, however. What takes higher priority, building wealth with that income or buying a car you will use for many years and ultimately want to feel pleased with? There is no ‘better’ answer, just a matter of what you and your family will value. Cant wait to read your decision!
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moneysma November 20, 2012 at 9:54 pm

Thanks for your input. Unfortunately where I live public transportation would only take me part way to my job. The rest of the trip is highway, so biking isn’t a great option either. I will have to seriously consider what is more important: building wealth or buying a car!

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