Many say: do not invest while in debt. Of course, it makes some sense: all investing has some risk, and those in debt should usually stay away from risky financial decisions. However, does the old saying always turn out to be true? Well, let’s find out…
Is It A Bad Idea?
Generally speaking, the old saying still holds true: try and wait to invest until you’re out of debt. After all, when it comes time to make that monthly payment, you don’t want to need to sell your investments immediately after buying them to do so. Moreover, no investment is guaranteed, so you might find yourself with even less money a few months down the road and mounting bills.
However, there are a few times when investing while in debt is okay. First, if you can find a loan for less than 5% interest, one that could cover all your debts, consolidating them into one payment, and leave a little left over to invest, it might be worth looking into and speaking with a financial advisor. As long as your earnings remain higher than your loan payments, you’re in the green!
There are some other times when investing while in debt is also fine…
Lucky Years
Sometimes, you get lucky! If you’re in debt, but making on-time payments, and come into a windfall of cash, think about investing it! After all, if you’re already making your payments on-time, you shouldn’t need that extra money from a will or bonus at work to pay the bills. Instead, you can take that money and invest it, earning you a little extra cash on the side.
Of course, not everyone agrees. Alex Benke, Vice President of Financial Advice at Betterment, thinks it’s smarter to use that cash to pay off an even bigger chunk of your current debt. Both have their pros and cons, so be sure to think about it carefully before making a decision. You could also always throw it into a savings account until you know for sure what you want to decide.
401(k) and IRA
So far, we’ve mainly covered the stock market, real estate, and other, similar, types of investments. However, everything changes when it comes to investing in an IRA, ROTH, or 401(k). As these are necessary investments in your future, most financial experts agree that one should continue to contribute to these funds, even while in debt, due to the long-term benefits. The best is, worst comes to worst, many accounts will let you withdraw the money without penalties or taxes. Of course, always be sure to check the fine print before requesting a withdraw to make sure you do so in the quickest and most financially-smart away possible.
As you can see, there are more than a few opportunities where someone in debt might have the chance to invest. Should the occasion arise for you, make sure to talk to a financial advisor before making any significant decisions.
Sources: Mortgage AfterLife, The Motley Fool