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Should I invest if I’m in debt?

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BM Article August 27th

We’re all probably pretty familiar with the general order of “financial life events.” For the typical individual born in the last 20-40 years, most of us have been preached to this gospel of order: 

First, you finish up the education that’s required of you (highschool or a GED). Then, you either start out on your career path like a regular Bill Gates, or you’re whisked off to college. 

Here, you hopefully find a better idea of what you’d like to do, or you enjoy a lively social calendar and graduate to begin life in the real world. 

Now here you are, with a beater car, and a new monthly expense – your dreaded student loans.

You figure you need a more reliable car to get to your new job, so you take out a loan for a speeder you’ve had your eye on. 

A few years later, you and your significant other are ready to tie the knot, so you cosign a mortgage together.

Oh, and did I forget to mention that through those years in college you managed to rack up quite a bit of credit card debt?

This all too familiar story is probably the set-up for many disappointed American dreamers. It seems that to obtain financial stability, we must rely on so many institutions for a leg up in the form of a loan!

Maybe you’re the exception to the rule, and you graduated debt-free, or even started a successful business of your own as a child prodigy. Whatever the case – most of us have, at one point or another, been indebted to a lender. The question is: does this current and outstanding debt disqualify us from investing like the rest of them?

To dive into what might be the answer to this loaded question, let’s review different types of debts, and several debt elimination strategies that might give us an idea of a feasible timeline outlining when to pay debts, and when to invest hard earned money.

Probably the most common form of debt, Unsecured Debt is not backed by any initial collateral. Most often, we have unsecured debt in the form of a credit card.

To get your credit card, you probably just had to supply some personal information and boom – you have a credit limit! It might seem like free money, but most quickly realise this “free” loan comes at a cost if you didn’t have the money to pay off your card in the first place.

Secured Debt is backed by collateral. For example, when you buy a car with a loan, it technically doesn’t belong to you. The car is now collateral! If you don’t routinely pay off the lender, the car can be seized.

Mortgage debt is very familiar to many of us – it’s typically long term. In this case, the home you’re purchasing would stand as collateral (meaning this debt also falls under the Secured category).

So this covers the most common debts that many of us hold, but the question remains – can I still invest with these outstanding debts? 

There are several strategies recommended by experts to begin (or complete) eliminating these types of debts. It’s definitely up to you, as the investor, to decide when on these timelines is the opportune moment for you to begin investing.

Timeline 1: The “Prioritizing Interest Rates Method”

First, you’ll pay off your credit card debts (these can have astronomically high interest rates) and make a plan to stay on top of them in the future. Only use your card for what you can currently afford!

At this time you can also begin working on paying off student loan debts – the interest on these can certainly cause a headache if payments are ignored.

Next, you’ll begin paying off your car loan (this interest rate is probably less than your mortgage rate). Once you own your car (or even at the tail end of paying off this loan) – it’s a great time to start investing!

For the purpose of this example, investing would mean opening up a standard investment account, and/or beginning to contribute substantially to your retirement account at this point.

You’ll chip away at your mortgage for years to come, but if you have gains from your standard investments coming in, you can pay off your house much sooner than expected!

Timeline 2: “The Happy Retiree Method”

This method is very similar to the aforementioned, however it includes a vital plan for saving for retirement. 

To start with, if your employer offers a matching plan for your retirement account, take them up on it! Max out your contributions and you’ll certainly thank yourself later. 

Next, it’s time to focus on the unsecured debts mentioned earlier. Credit card and student loan debt – work at it! Right around the time that you eliminate these debts can be a great time to open a standard investment account. Now, if you have a mortgage, the gains you make can be put to good use!

There’s always been a controversy when it comes to the game of investing specifically to “beat” your interest rates and pay off outstanding debts with the gains from these investments. 

In the end, it depends on your personal risk tolerance. If you can handle living with the stress of outstanding debts and market fluctuations while you tuck away money in a promising investment, this can really work in your favor. 

However, if you’re like me and debts keep you up at night, it might be best for you to pay off your debts as quickly as possible (while still saving for retirement!), and then look at investing. 

Whatever you decide, both investing and paying off your debts can be rewarding financial steps that will serve you well as you plan for the future!

Contributor’s opinions are their own. Always do your own due diligence before investing.

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