This is a tricky one. If you’ve lived with credit card debt for any amount of time, you’ll recognize that, unless you are an investment wizard, you’ll be losing money faster than you gain it. a 22.99% interest rate on the VISA easily trumps your 9% gain on those mutual funds.
But is it as simple as that? In fact, there are some ways that I would recommend investing, even if you are in debt. Each of these is subjective, an depends on your personal situation. Sit down with a finance professional and talk it out, before deciding to allocate money toward investment instead of to your debt.
1) Investing For Retirement, When Starting Early
If you are young, and in debt, I would still recommend maxing out your IRA every year, if at all possible. This applies to your 401k and any similar accounts you have concurrently. Even though your IRA isn’t going to bring in returns that will rival the high interest rates you are fighting on your credit card, the key to big retirement yields is time. By starting retirement savings early, you are giving that money a lot of time to compound and grow. I would add that this is only an option for people with non-emergency level debt.
If you have high-interest debt in excess of $10,000, you should make it a very high priority in your life. Retirement savings can wait. Only you can know when to curtail retirement savings, according to how much debt you have. A finance professional can help. But generally, I’ll to everything I can to fill up an IRA, knowing that the money I’ll gain down the line is much more than I’ll spend on this debt in the here and now.
2) Invest When You Have Low-Interest Debt
If you have a lot of low-interest debt, like your home mortgage and some student loans (if you don’t have a pay-by date for the whole loan), consider investing while you make your minimum payments. Because the rates are low, you can figure out exactly how much more you will pay over the lifetime of your loan than if you paid it all at once.
In the meantime, mutual funds growing at 9% a year will far outpace your 3.7% mortgage interest rate. If you have the luxury of paying off this kind of debt early, it can be a great weight off your shoulders. Then you’d be able to save much more each month for your other investment goals. But I wouldn’t get ahead of yourself. Just pay the minimum as normal, maintaining your investment contributions, and only pay extra if you are near the finish line or if your financial situation suddenly changes.
3) Invest Aggressively When You Invest
If you are young and investing in spite of debt, pick higher risk/higher reward investments than an older person would make. This might mean having more than 90% of your funds in stocks, or trying your hand at spread betting markets. Whatever the case, take on only so much risk that you can sleep well at night, but also understand that well chosen investments, held onto for the long haul, stand a good chance of surviving market fluctuations.
Living with debt is troublesome, but you can get your financial house in order even as you work to conquer it. By allocating steady contributions to various investments, you’ll set yourself up for a much better life once you are able to eliminate debt completely from your life.
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