Ad Blocker Detected
Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker.
When people are under a lot of debt, investment can seem like the last thing they’ll ever do. In fact, investment isn’t recommended, even by experts, when debt is too high. This is perhaps an oversimplification, as there are many kinds of debt, and not all of them are equally troublesome. It’s all in the rate of interest. If you have high interest debt, like credit cards or any other source with 10% or more of annual interest, you’ll have a really hard time having an investment that grows money faster than you’re losing it. Since there’s little point in investing if you’re losing money at a faster rate somewhere else, then it makes sense to pay down your debt first before you get serious about investment.
But most people with lots of high interest debt don’t have much experience in paying it off. If they had that experience, they wouldn’t have the debt in the first place. Getting rid of debt so that important investments can start to pay off is a challenge. It requires you to change certain ingrained behaviors, and learn new positive habits. In the end, it’s worth it.
One of the best ways to start eliminating your debt is to consolidate it with a lower interest loan. This SoFi Personal Loan Review gives some good examples. Basically, you want to get rid of your highest interest rates, while making your monthly payments more efficient. If you have thousands of dollars of debt split between three credit cards (15.9%, 20.9%, and 23.9% APR), then you are losing money at three different rates, and likely having to make payments on three different days.
That’s a lot to keep up with. It makes much more sense to pay off all of those debts with a single loan. There are many lenders who cater to people in this situation. They’ll provide loans with lower APR than the three APRs in the example above. Perhaps you might get one that has only 13% APR. Not only does this slow the rate at which your debt accrues, it gives you a single target rather than multiple debt targets. It’s just an easier way to pay.
Once you have paid off all of your high and middle interest debt, you can start thinking about investing. It is common for conservative investments to see returns of 7-9% (yearly average). If you are steadily paying off your remaining debt, and it has an APR that is equal to or lower than your investment returns, then you have a good reason to start investing as soon as possible.
Another argument in favor of investing is that time is very important for creating large returns. If you don’t start early enough, you won’t give your investments time to grow. If you have sufficient income to pay down high-interest debt and invest, you might conceivably do both. But really, it makes more sense to do the debt before the other, unless the interest rates are pretty close.