Should I Invest Even Though I Have Credit Card Debt?
Investing allows you to grow your money. You can greatly increase the rate of your return on your money when you invest it instead of simply leaving it in the bank. However, carrying credit card debt while you are investing money is a poor choice. The interest rate on credit cards is usually higher than the average rate of return you will receive on money that is invested. Instead of letting your money work for you, you are allowing the money to work against you when you carry high interest rate 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. You can look at the rate of return on your investments. The best mutual funds have a rate of return of around eight percent, some may be higher, some may be lower. Many credit cards have an APR or interest rate of seventeen percent or higher. It is simple math, you are paying a higher interest rate on your debt than you are earning in interest. Unless you have a huge amount in investments, you end up losing money overall. If you do have a large amount of money, you can likely pay off your credit cards today by cashing out some of your investments.
Additionally, it does not make sense to invest your money when you are having more money going out than you are having coming in. Most financial planners will encourage you to get out of debt before you seriously begin investing your money in other sources.
You can take the money that you would be investing and apply it to your credit card debt. This will benefit you financially because you will reduce the amount of interest that you would pay. It may seem counter-intuitive, but ultimately it will help you more in the long run to pay off your debt first.
Take control of your spending 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
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. This will change your financial picture because your money will be working for you instead of against you. This is the key if you are serious about 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 balance your portfolio so that you have a combination of higher and lower risk investments.
What About Saving for Retirement?
The one exception to this rule is investing in your retirement account through your work. You should invest up to your employer's match while you still have credit card debt. This is one way to receive extra money for retirement and you should take advantage of the opportunity. Once you are out of credit card debt you should work on bringing your retirement savings and investing up to fifteen percent of your income. After you have saved up for a down payment on your home, you may want to begin putting more money into savings so that you can build wealth. The key to investing is to invest regularly, and to choose mutual funds that allow you to diversify your investments.
How Do I Start Investing?
If you have never invested money before, you may want to use a financial planner who can help you plan to reach your financial goals.
An easy way to begin is using mutual funds because the risk is lower since mutual funds spread the risk over several different stocks for each share. Once you begin to understand the market, you can spread your investments out a little bit more. You should never invest all of your money in one single stock or fund. This is too risky. You can consider real estate as another alternative, but you should purchase it with cash.
The key is to start setting money aside each month and to do it consistently in the future. If you do this, your investments will steadily grown. You can have the money automatically transferred into your investment account each month. Many investment firms will waive minimum investment requirements if you set up an automatic transfer.