Should you pay off debt like student loands or invest your money in the stock market?
It’s a question we get asked a lot and we want to help you make the right decision.
So today, we’re going to give you our thoughts along with an action plan on how you can invest while you still have debt.
Should you Pay off All Debt Before Investing?
Do you feel you need to be debt free before investing in the market?
Many people assume you have to be debt free before you can invest in the market.
However, we believe that’s wrong because you are letting your past have too much of an effect on your future.
Even though the market has been volatile, we believe it is still a great time to be invested in the market.
So if you have debt and feel like it’s preventing you from investing what do you do??
First, even though we want you to get out of debt because it’s a 4 letter word, we know that not all debt is created equal.
Invest or Pay Off Credit card debt
When it comes to credit card debt. You need to get rid of it and do it as fast as you can.
Why? Because the average investor cannot get a return in the market as high as the interest you are paying on credit card debt.
The average credit card interest rate is around 16% .
In our post about the mistakes beginner investors make we told you that it’s easier to get a higher return just by saving more of your paycheck than by investing.
Paying off high interest credit card debt is one way to do it.
You can make 16% just by putting that money back into your pocket instead of giving it to the credit card company.
If you want to decide which one of your credit card debt you want to pay first.
You should pay the one with the lowest amount first.
Although it might not be the one with the highest interest rate, it’s a way to give you a quick win.
Debt Without A High-Interest Rate
If you have debt that is weighing you down and you can’t sleep at night, you need to tackle that too before you are investing.
No investing if your money situation is forcing you to stay up at night.
Now that you have our POV Here’s how you can invest and pay off the debt at the same time.
Invest and Pay Off Debt Action Plan
- Invest before you get your check
Put money into your job’s retirement accounts. This will happen before you check hits your bank account and is your pretax income.
We want you to invest in your job retirement account such as 401k etc.
You are funding this account with pretax income and it will grow tax deferred.
Additionally, it should come with some type of money match from your company.
This is FREE MONEY which is something you always take.
Your retirement account should be a long term investment that uses the power of compounding.
A retirement nest egg is something that you will definitely need in the future so don’t sacrifice it because of debt.
Invest what you can spare while you have debt, and then grow it from there.
You can always increase the amount in the future. The main thing is to start.
- Use After tax money
If you are living paycheck to paycheck we do not want you to invest.
Remember, nothing is a sure thing and we only want you to invest money that you can afford to lose.
So how do you free up money?
The best way, is by lowering your bills and expenses.
Since debt/ credit card amounts and dates are fixed we want you to work on the other expenses that you can control.
Lower Your Expenses
Lower expenses such as groceries, subscriptions, cable bills, and entertainment so that you can free up money.
After that, we want you to do the following so that you can invest and pay off debt at the same time.
- Make a list of all the bills you have to pay for the month along with just the minimum payment for credit card payment and other debt.
Set the money aside for all of those.
2. Split up your money following the guidelines below to start investing while taking care of the rest of your needs:
- Take 50% of the money left over after you pay your bills and put it into a savings account. This will become your emergency fund.
- Take 30% of the remaining money and add it to your credit card payment.
- Take the 10% of the remaining and add this to your current payments on all other debt.
- Invest the remaining 10% .
Let’s see how this would work with real numbers.
You add up your bills and subtract the amount from your paycheck.
You find out that you have $200 left over. The numbers would look like this:
$100 for saving
$60 to credit card debt
$20 for other debt
$20 for investing
Why Budget this way?
It is because we believe only depending on your job for income is risky.
You need some money on hand to cover your basic needs in case you lose your job.
How long should you Follow this Savings Plan?
We want you to follow this until you have at least have 6-9 months of Emergency savings.
This is the new baby you are working on.
After you have at least 6 months of emergency savings you can follow this breakdown on how to split up your money
60% credit card debt
20% other debt
You will be investing and saving while at the same time while making paying off debt a priority.
Why you shouldn’t pay down your Debt more aggressively?
We suggest that you don’t pay down your debt more aggressively because the interest rate you are paying on long term debt is not as high as the interest on credit card debt.
However, as we said earlier if your debt is causing stress in your life and keeping you up at night pay it off quickly.
Throw as much money as you can at it and get it off of your mind.
So what happens if you follow our guidelines and have just a little cash to invest?
How to Invest with little Money
Here’s 2 options that allow you to invest with very little money.
Option 1 : The Fidelity ZEROSM Total Market Index Fund (FZROX)
It’s commission-free, has no expense ratio, and has no minimum to get invested.
That means you can invest starting with just a dollar.
What’s more, it’s an index fund so you have instant diversification.
You can own a stake in different companies just by holding this one security.
Option 2 : Fractional shares
Many online broker like Charles Schwab are now offering a way to own top companies by just investing $5.
They are allowing you to buy fractional shares.
Check out our fractional share video here to learn more:
If you like investing and you are still in debt, the two don’t have to compete.
Use our guidelines to use your extra money to continue to pay off debt and invest at the same time.
Or become really ambitious and set a goal to pay off your debt in record time.
Check the link below to download our 6 figure job interview guide for free. It’s the method we both used to land our first 6 figure jobs.
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Do you think these guidelines are helpful and would work for you?
We would love to know.
Other Articles you may like:
Invest Your Money Or Pay off Debt | The Right Decision
Nadia is a Financial Independence Coach from New York City. She holds a B.A from Columbia University and worked 13+ years in Investment Banking and Financial Services. She is an entrepreneur, investor, and partner at Wealth Twins LLC. She reached Financial Independence in her 30’s and is passionate about showing others how to achieve the same.