How to Invest when You Are in Debt
Learn more about your debt., Read the fine print on your debt., Evaluate how debt expenses compare to investment earning potential.
Step-by-Step Guide
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Step 1: Learn more about your debt.
There are three kinds of debt.
Depending on what kind of debt you have, you may or may not be a good candidate for investing while in debt.
You can invest if you have low-interest or tax-deductible debt.
You probably should not invest when you have high interest debt.High interest debt is the type that you typically accrue on your credit card.
Debt with an interest rate of more than 10% is high interest debt.
Low-interest debt is debt that has an interest level below 10%.
Personal loans, car loans, or other lines of credit that you might get from your bank are probably low-interest debt.
The best type of debt you can be in and still invest is tax-deductible debt (TDD).
TDD accrues on mortgages, student loans, business loans, and other loans that offer tax deductions on interest.
It is always a good idea to refinance high-interest debt with lower interest debt, if you have the opportunity. -
Step 2: Read the fine print on your debt.
Some debt must be paid off completely within a certain amount of time.
Other forms of debt – mortgages, notably – have penalties for prepayment, so even if you wanted to pay it all off at once, you’d be discouraged from doing so.
Find out more about your debt before deciding to invest.
The details of your debt should partially guide how you formulate your plans to invest while paying it off.If you have debt with a penalty for early payment, it might be a good idea to turn your income toward investments rather than paying off your debt.
Compare how much the penalty will cost compared to long-term cost of the interest on the debt.
If the penalty is higher than the interest, invest the money instead of paying off the loan early.
You might need your potential investment funds to pay off debt, especially if it carries a high minimum monthly payment and/or a high interest rate. , Before investing while in debt, you should seriously consider whether or not now is the right time to do so.
If you pay off your debt before investing, you’ll be able to get rid of the compounding interest and breathe a sigh of relief that you’re debt-free.
But if you invest while in debt, you’ll have to continue paying at least the minimum monthly payment toward your loan while juggling your investments.If you have high-interest debt, you should almost always pay it off before investing.
TDD loans are often low-interest.
This means that you may be able to afford spending your extra income on investments instead of trying to pay off your loan early.
Use the CalcXML debt and investment calculator at http://www.calcxml.com/calculators/pay-off-debt-or-invest to help you decide if investing is a good idea given your current debt levels. -
Step 3: Evaluate how debt expenses compare to investment earning potential.
Detailed Guide
There are three kinds of debt.
Depending on what kind of debt you have, you may or may not be a good candidate for investing while in debt.
You can invest if you have low-interest or tax-deductible debt.
You probably should not invest when you have high interest debt.High interest debt is the type that you typically accrue on your credit card.
Debt with an interest rate of more than 10% is high interest debt.
Low-interest debt is debt that has an interest level below 10%.
Personal loans, car loans, or other lines of credit that you might get from your bank are probably low-interest debt.
The best type of debt you can be in and still invest is tax-deductible debt (TDD).
TDD accrues on mortgages, student loans, business loans, and other loans that offer tax deductions on interest.
It is always a good idea to refinance high-interest debt with lower interest debt, if you have the opportunity.
Some debt must be paid off completely within a certain amount of time.
Other forms of debt – mortgages, notably – have penalties for prepayment, so even if you wanted to pay it all off at once, you’d be discouraged from doing so.
Find out more about your debt before deciding to invest.
The details of your debt should partially guide how you formulate your plans to invest while paying it off.If you have debt with a penalty for early payment, it might be a good idea to turn your income toward investments rather than paying off your debt.
Compare how much the penalty will cost compared to long-term cost of the interest on the debt.
If the penalty is higher than the interest, invest the money instead of paying off the loan early.
You might need your potential investment funds to pay off debt, especially if it carries a high minimum monthly payment and/or a high interest rate. , Before investing while in debt, you should seriously consider whether or not now is the right time to do so.
If you pay off your debt before investing, you’ll be able to get rid of the compounding interest and breathe a sigh of relief that you’re debt-free.
But if you invest while in debt, you’ll have to continue paying at least the minimum monthly payment toward your loan while juggling your investments.If you have high-interest debt, you should almost always pay it off before investing.
TDD loans are often low-interest.
This means that you may be able to afford spending your extra income on investments instead of trying to pay off your loan early.
Use the CalcXML debt and investment calculator at http://www.calcxml.com/calculators/pay-off-debt-or-invest to help you decide if investing is a good idea given your current debt levels.
About the Author
Gregory Jones
Experienced content creator specializing in cooking guides and tutorials.
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