Should You Invest If You’re In Debt?
Information for this article was provided by Chime.
Investing in the stock market can be an effective strategy to improve your economic well-being, but it’s not always the most straightforward—especially, when debt comes into play. Whether you’re paying off student loans or still making payments on a mortgage you took out a decade ago, the simple truth is that most of us carry some form of debt. This undoubtedly adds another layer of complexity to financial decisions, and begs the question: should you invest if you have debt?
The reasons why you’d want to eliminate debt altogether are numerous. For one, dealing with debt is stressful, and dealing with stress on a daily basis can lead to serious health complications. By becoming debt-free, you’ll acquire ownership of all your assets (like your house and car), improve your credit score, and will no longer face the burden of making interest payments every month.
Having zero debt is ideal. But if you’re one of the millions of Americans that have it, should you forgo investing altogether? The answer: it depends. In simplest terms, it all boils down to two factors:
- If your after-tax interest rate on your debt is greater than your after-tax rate of return on investments, you should pay off your debt
- If your after-tax rate of return on investments is greater than your after-tax interest rate on your debt, you should invest.
Put another way, suppose you’re making payments on a student loan with an interest rate of 6 percent. Then, being the savvy investor you are, you managed to build an investment portfolio where you are expected to see a return of 8 percent. Over the long run, it’s possible that the returns on your investments will exceed your student loan interest payments (as well as the costs of inflation), allowing you to come out on top.
However, this amount of risk isn’t for everyone, including billionaire investor Mark Cuban. In an interview with CNBC, Cuban suggests:
“Whatever interest rate you have—it might be a student loan with a 7 percent interest rate—if you pay off that loan, you’re making 7 percent. That’s your immediate return, which is a lot safer than trying to pick a stock or trying to pick real estate, or whatever it may be.”
Indeed, debt often carries interest rates far beyond even the savviest investor’s returns (the average credit card interest rate is a whopping 16.71 percent!). So, your best bet in many cases may be to wait until you’ve finished paying off your debt.
When you’ve finished paying off your high-interest debt, there are some investments you’ll want to make sure you’re not neglecting; most notably, a retirement fund (such as a 401K plan) and a Roth IRA fund. In both cases, you’ll want to max out your investment and start investing as early as possible to fully capitalize on compound interest gains.
The key is to stay on top of your finances and make sure you’re actively contribute to each fund every month. One of the simplest ways to do this is to employ the help of financial management services like Mint and/or mobile banking services like Chime that help you know where you stand each month, and how much you’re able to contribute.
Another great place that many investors (including Cuban himself) recommend starting is investing in cheap S&P 500 index funds. Investing apps like Acorns offer a simple way to make investment gains by rounding up your spare change and automatically investing it across a portfolio of the largest 500 companies in the U.S.
No matter what you decide, just be sure you’re comfortable with your decision. Investing while you have debt can be a risky endeavor and isn’t for everyone. But if you stay the course, even through turbulent market conditions, you’ll eventually reach the end goal of becoming debt-free all while maintaining an investment portfolio.
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Should you invest if you're in debt? Here are some factors to consider before making that decision from @Chime. v/@AmericaSaves! http://bit.ly/2PK9z4Y