Should You Make Investments While Being in Debt?
February 10, 2020 (Investorideas.com Newswire) For a number of people, debt is a growing problem that can be difficult to manage. It can feel like your life is on hold while struggling to pay off your loans and accumulating interest month after month. Depending on how bad your situation (and credit score) is, you may not even be able to apply for a mortgage, lease a vehicle, or in the worst case scenario, get a job.
One of the things you may be considering is whether or not you can make investments while in debt. In theory, making an investment can help you pay off your debt down the road as you begin to see positive returns.
But while this line of thought does work in theory, the reality is that investments carry no guarantees with them, and you may end up just losing even more money than you had to begin with. Despite this, there are some circumstances where it may be okay to make an investment, but it's important to know that there is risk involved.
Key Factors to Consider Before Investing
The safest approach is to wait until you're debt-free before starting to look into investing. That being said, if you're willing to take a risk, here are the factors you should consider first.
Take into account both the current and future interest rates on your debts (especially if they will increase after a certain period). If these rates are close to or higher than what you expect to earn on your investments, then investing isn't worth it. You won't be making enough in returns to make up for what you're paying in interest.
Even if you decide to hold off on paying off your debt, you still need to at least make your minimum payments all while covering your basic monthly cost of living (i.e., rent, groceries, utilities). Consider whether or not you can actually afford putting aside money towards an investment under your current financial circumstances.
If the answer is no, then you either need to tackle your debt first or make lifestyle adjustments so that you have more money left over after making all essential payments.
In Case of Emergency
The financial experts at not-for-profit credit counselling agency Credit Canada Debt Solutions caution that being in debt can leave you in a vulnerable position if ever there is an emergency, like losing your job or having to pay for some large unexpected expense. Again, in theory you could use some of the money you've invested, but since there's no guarantee that you'll have earned money by this point, you may just end up cutting your loses.
That's why before considering investing, you should have yourself an emergency fund in savings set aside to deal with these unexpected events. Prioritizing this first before investing is the safer way to go.
What About Good Debt?
If you have what's considered good debt - like a mortgage or student loan - then you don't have to worry as much about the above considerations. These types of loans generally have low interest rates, so making investments while carrying good debt may just prove to be a worthwhile option for you.
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