Should I Invest Even Though I Have Credit Card Debt?
Investing is a great option to help build wealth and grow your money since the average rate of return on investing in the stock market makes it a better choice than simply leaving your money in the bank.
But if you have credit card debt, investing may not be the right choice for you. Here's why: The interest rate on credit cards is usually higher than the average rate of return on your investments, so by investing (rather than paying down your debt), you'll actually lose money.
Learn more about whether you should invest if you have credit card debt.
How Am I Losing Money If I Invest with Credit Card Debt?
The best way to illustrate this is to simply look at the numbers. Compare the rate of return on your investments to your credit card's annual percentage rate (APR). The average rate of return for stock market investments is around 8 percent, while many credit cards have an APR of 17 percent or higher.
So, if you are investing when you have credit card debt, you are likely paying a higher interest rate on your debt than you are earning in interest via your investments. Unless you have a huge amount in investments, you end up losing money overall. Worth noting: If you do have a large amount of money invested, it's wise to pay off your credit cards by cashing out some of your investments.
That's why most financial planners will encourage you to get out of debt before you begin investing your money. Instead, take the money that you would be investing and apply it to your credit card debt. This will not only chip away at your debt, but it will also reduce the amount of interest you'll pay
Not investing may seem counter-intuitive, but ultimately it will help you more in the long run to pay off your debt first. Additionally, stop using your credit cards and get on a budget so that you can pay off your debt more quickly.
Use the Money You Were Spending on Your Debt to Invest
But here's the good news: Once you have paid off your credit card debt, you can take those payments and add it to the amount of money that you would be investing. This will increase the amount that you invest, and you can quickly make up the time you spent on getting out of credit card debt.
Investing will truly change your financial picture because your money will be working for you. Investing is an important step in building wealth. As you continue to save and invest, you will eventually get to the point where your money earns more than you contribute each month. Once you do this, your wealth will begin to grow quickly. To reach this point you need to invest steadily each month.
Be sure to focus on building your investments. It is important to remember that investing is a long-term process. If you are worried about the market trends, you can talk your financial planner and determine the type of risks that will fit your comfort level. Not everyone is comfortable with high-risk investments, but they do offer a higher rate of return. You may want to diversify your portfolio so that you have a combination of higher and lower risk investments.
What About Saving for Retirement?
The one exception to not investing when you have credit card is saving for retirement. If you are contributing to a 401(k), 403(b), or IRA, then your retirement funds should be invested. You should invest at least equal to your employer's match, even if you have credit card debt. This is basically free money and you should take advantage of it.
Once you are out of credit card debt you should work on allocating at least 15 percent of your take-home pay into retirement.
How Do I Start Investing?
If you are just getting started with investing your money, you may want to use a financial planner who can help you plan to reach your financial goals. You may also consider investing in mutual funds because the risk is lower.
Once you begin to understand the market, you can take more risks when it comes to your investment portfolio. But remember, your investments should become progressively more conservative as you get older. Also, you should never invest all of your money in one single stock or fund. This is too risky.
Other tips for new investors: start setting money aside each month and to do it consistently in the future. Also, you can have funds automatically transferred from your checking account into your investment account each month. Many investment firms will waive minimum investment requirements if you set up an automatic transfer. This is a great way to get into the habit of investing your money and making it work for you.
Updated by Rachel Morgan Cautero.