Should you invest while still in debt? When should you start investing? You may want to start investing despite still being in debt.
Is it ever appropriate to invest while in debt? The presence of the word “ever” in that question should be a hint that the answer is “yes”. If you figured that already, then good for you and right you are.
Is it Ever Appropriate to Invest While in Debt?
But it’s a “yes” with qualifications. Investing while in debt should be the exception to the rule. There are, however, a number of exceptions, some of which we’ll talk about here.
Investments that can be engaged in with skill, like binary options trades through Banc de Binary, are one such exception. These are trades that can be completed in seconds, which have the potential to multiply invested amounts several times over.
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For those skilled at this method of trading, it’s a great way to make money, and can be used to gain the funds necessary for total debt cancellation. It’s also a risky proposition and one that should only be taken part in with money that won’t be missed if the investments don’t pan out. But for people who enjoy past paced and fun investment models, this can be a great one to add to your repertoire.
Most of the argument against investing while in debt comes results from a simple concept: debt tends to add up much faster than wealth. Investors hope for 7-9% annual returns from mutual funds and other stock market gains. But high interest credit card debt can accumulate at 25% annually – sometimes even more!
The math is simple. You won’t make money if you’re taking on debt faster than you’re growing wealth. If you have high interest consumer debt, there is almost no good reason to invest until it is paid off.
But not all debt is as insidious as high interest credit card debt. “Good” debt is something that’s a part of every mature financial life. Good debt includes mortgage loans, reasonable amounts of student debt that pays for a quality education, money spent on an affordable vehicle loan that allows you to travel to a good job, etc.
Good debt is structured to be affordable, to have a comfortable place in a person’s financial life without drowning them. Mortgage loans are frequently in the 3-5% range (these days at least). If you’re making 7-9% in the stock market, it’s easy to see how it might be worth it to invest, even with good debt.
But is there any argument for investing with medium-quality debt? We’re talking about debt in the 10-15% APR range, give or take. While you aren’t likely to make more than 15% at the stock market every year (if you do, please tell me how you did it), it can be worth it to make regular contributions to investment accounts which are meant to grow over decades.
These are retirement accounts, and other similar examples. Because of the power of compound interest, your early allocations are the seeds which determine how much wealth you’ll end up with during retirement. If you have reasonable amounts of consumer debt, it can be sensible to maintain annual IRA contributions, for example, even before this debt is paid off.
What about you? Should you invest while in debt? I’d love to hear your thoughts in the comment section below.