There’s no denying the importance of investing for maximum long-term returns. But, when people are confronted with credit card balances and other forms of debt with 20% or more interest rates, it can be difficult to decide which financial strategy to prioritize. On the surface, it may seem that debt repayment should come first in order to get your finances out of the red and back on track to continuous growth.
However, when you calculate the potential long-term benefits of pouring at least a chunk of your money into compounding investments, you might discover that investing could be more advantageous. If you’ve been struggling with debts while trying to plan for the future with carefully chosen investments, here are five things you should do while balancing your financial situation.
Debt Repayment Strategies
Prioritize Retirement Savings
Even if you currently hold thousands of dollars of credit card debt, student loan debt, personal loans, or any other types of debt, you should still prioritize saving for retirement above all else. So many people are approaching the average retirement age with little to no savings, which means they might be stuck working for the rest of their lives.
When it comes to retirement savings, the earlier you begin, the better off you’ll be in old age. Someone who begins saving in their 20s or 30s will likely be in a much better financial position compared to someone who begins saving $800-1,000/month in their late 30s/40s or early 50s.
Whether you invest in an IRA, 401(k), or other types of retirement plan, you simply can’t beat the compounded interest and tax advantages of retirement savings accounts so be sure to make this your number one priority when you’re figuring out how to balance your debt repayment and investment strategies.
Negotiate Interest Rates
Did you know that you can likely get a lower interest rate on your credit card by simply calling the company and asking them to lower it? In case a simple phone call doesn’t work, do some research to find out what your company’s competitors are currently offering in terms of interest rates. Use this information to negotiate a lower rate.
If your company still refuses, then remain polite but persistent. You may try calling a few more times to speak with different representatives, or even ask for a manager. This is especially useful if you’ve been a loyal customer who’s submitted timely payments for many years.
If none of these tactics work with your current credit card companies, then consider applying for a new credit card that has a lower interest rate and low balance transfer fees. That way you can escape your unhelpful company and reduce the amount of interest you’ll have to pay on remaining credit card balances.
Pay Off High-Interest Debt First
Some people prefer making equal payments on all of their credit cards and loans, but a better strategy would be to pay off the card/loan with the highest interest rate first. At the same time, make minimum payments on your other cards.
For instance, a $1,000 balance on a credit card with a 25% interest rate will squeeze much more money out of you in a shorter timeframe compared to a $3,000 balance on an auto loan with a 5% interest rate.
To balance high-interest debt repayments with investing, you should consider setting aside a certain amount each month to put towards retirement savings and other investments. Whatever is left after these investment funds are deducted from your budget can then go towards debt repayments.
Student Loans: Overpay Towards Principal
If you’re like 40+ million Americans, you might be in the process of paying off student loans while trying to build a better financial future for yourself. Fortunately, student loan interest is tax deductible, so unless your interest rates are 10-12% or higher, you shouldn’t be in too much of a hurry to pay off the loans as fast as possible. Instead, you could be splitting your money more evenly between student loan payments and investments.
Of course, you should still try to pay more than the monthly minimum payment on your student loans – but don’t assume your lending company will apply the excess payments to your principal.
As crazy as this may seem, the Consumer Financial Protection Bureau recommends that you directly contact your lender to inform them that you want all excess payments to be put towards your principal amount. Otherwise, many lenders have put the excess towards accumulated interest without the borrower’s knowledge – making a direct request will ensure that you’re able to pay off your loans more efficiently.
Gradually Increase Auto-Investing
A final way to balance your debt repayment and investing strategies is to gradually increase the amount you have automatically transferred into an investment account from your paycheck or bank account each month. If you’re still in the early stages of your career, you can safely assume your income will increase over time, and it’s important that your regular investments increase alongside your income.
You can accomplish this by manually increasing the amount your retirement account receives each month. Start with $100/month when you’re fresh out of college, $300/month when you’re in your late 20s/early 30s, $750/month when you’re in your 30s/40s, and so on. All too often, people give in to what’s known as “lifestyle creep” by increasing their spending on regular expenses like housing, food, and clothing without putting more money into investments at the same time.
For a clearer bright line, try to always be putting at least 10% of your income into investments, even when you’re in the middle of repaying debts. You may not reap any immediate rewards with this future-oriented strategy, but you’ll be in a much better financial situation when you approach retirement age.