The idea of investing while in debt may appear crazy to some people. They may be interested, but unsure where to start. Despite being in debt, you can still turn your financial situation around through investing.
You will find out that investing can be effective in growing your wealth in the long run. Note that, investing is not just something you jump into; you need to make careful, and calculative decisions on what you intend to invest in. For instance, if the ROI – return on investment – that you get per year is less than the interest you are required to pay yearly, then you know that investment is a bad one.
Investing while in debt is possible. You just need to make sure that you understand a few things about it first.
Read the Fine Print on Your Debt
Some types of debt have to be paid within a certain period. Other carry sanctions when paid early like mortgages. Whatever debt you have, it is best to know its details before you invest as this will influence your plan for investment while trying to pay off the debt.
If you have a debt that comes with a sanction for prepayment, you will be better off investing the money rather than settling the debt. Make a comparison between the cost of the sanction and the long-term interest rate on the debt. If the interest is lesser than the sanction, invest your money rather than paying off the debt. On the other hand, if your debt requires a high monthly minimum payment or a high-interest rate, the funds you wish to invest may be needed to pay off the debt.
Evaluate How Debt Expenses Compare to Investment Earning Potential
It is important to put proper consideration into whether or not this is the right time to invest. Paying off your debt before investing is a lot easier, plus you get to relax knowing you don’t have any debt attached to your name. Nevertheless, if you decide on investing while in debt, you will have to deal with your investments while paying at least the minimum monthly payment on your debt. If you have high-interest debt, it is best to settle it first before making any investments. Tax-deductible loans are usually low-interest, so you can invest rather than try to settle your debt early.
Max Out Your Financial Retirement Plan
Some employers offer their employees a retirement plan (mutual fund or series of stocks that a part of your income goes into). If you have a retirement plan at your place of work, contribute to it even if it will make the duration of your debt last longer to settle. Find out how much of your contribution your employer would deliver and then invest that much. For example, your employer delivers $400 a month, invest at least $400 into your retirement plan.
Prioritize Your Debt
If your debt comes from a lot of sources, identify the one with the highest interest rate and either renegotiate the terms of the debt or settle it. When you have done this, you will have more freedom to invest. Contact your financial organization to find out if you are entitled to a reduction in the interest rate on your debt or consolidation, especially if you have two loans from the same organization. Identify how much savings you can make by settling your debt at various rates – use Bankrate’s debt calculator.
While You Invest, Continue Paying Off Your Debt
If you are now investing, it does not mean that you should stop paying money on your debt. It is best to think of settling your debt as an investment. In the long run, you will find that paying lower interests saves you some money.
Determine Your Risk Level
What you choose to invest in must be based on three things: the level of risks you can bear, the return on investment, and the amount of time you plan to keep investing. All of the above will help you decide if a high-risk, high return investment or low-risk, low-return investment is best. If the amount of debt is small and you have a lot of cash, you can commit a small part of the money to high-risk investments and the more significant part of it to low-risk investments. If you only want to invest for just a year, it would be best to invest in low-risk investments because high-risk investments have a knack of fluctuating within a short period.
Make sure you have emergency cash to lean on before you invest. Your emergency cash should be able to cover you even if you are unemployed for 6 months and in the event of a medical condition.
Put Your Money in Cash Equivalents
Money market funds or cash equivalents do not come with a lot of risks, but they don’t have a lot of returns either. However, you can easily access them and change them for cash or other investment. So, if easy accessibility and flexibility are what you need, this is best for you.
Invest in Ownership Investments
Ownership investments are the major things that come to mind when talking about investments, and although they are risky, they are very profitable. They include investment in stocks, real estate, precious artifacts, and business investments.
Stocks give you ownership over a small part of a company. Stock value is determined by the company’s performance – an increase in company profit increases the stock price, and company loss leads to a decrease in stock price. Stocks are easily cashed out whenever needed by offering them up for sale.
Business investments come with high risks but also great profits. A lot of businesses fail in their start-up year, but those that profit bring great rewards to people that invested early. Note that predicting business risks isn’t entirely easy. Contact venture capital firms before investing in a business.
Real estate investment entails investing in lands buildings, housing, or rentals. Usually, real estate appreciates, but if the market is down, you may find it hard selling off a place, and if you intend to sell off the place immediately, you might end up incurring a loss. Therefore, real estate is not very liquid.
Invest in Lending Investments
Lending investments have lower risks than ownership investments, but they do not come with great reward either. The most common type of lending investment is a Savings account.
Another type of lending investment is bonds – instruments of debt published by government or corporations to raise money. In the long run, the value of bonds increases and can be cashed in at a profit. Bonds have higher interest rates than savings accounts. The most widely known types of bonds are Treasury notes and CDs.
The major steps involved in investing while in debt include:
- Evaluating your debt situation first
- Juggling your debt and investments
- Deciding to invest.
All of these have to be put in place and followed down to the letter. It is unwise to plunge into any venture without first determining the risks and rewards to know if it is worth risking. If you decide to invest while in debt, keep in mind that you may need a financial advisor and you have to ensure that you find out all the details regarding the kind of investment you want to pursue before diving in; otherwise, you risk losing everything. Money market, ownership investments, and lending investments: all these come with profits, although some have higher risks than others.
Jason is the blogger behind My Money Chronicles.