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Investing When You’re in Debt: What’s the Secret?

?The average American is heavily in debt. Between credit cards, student loans, car loans, and home mortgages, this debt can sometimes be suffocating.

The average American is heavily in debt. Between credit cards, student loans, car loans, and home mortgages, this debt can sometimes be suffocating. At the same time, you also feel the pressure of investing and saving for retirement. How can you do both at the same time?

Develop a Plan of Action

Each family has its own unique stressors, but money is something that almost every household struggles with at one point or another. If you’re feeling anxiety over debt, investing, and the proper way to approach these issues, the following tips will help you get some things in order.

1. Develop an Emergency Fund

Paying off debt and investing for the future are both important, but neither matters more than putting food on the table and keeping the lights on. Before you do anything else, you’ll want to develop an emergency fund of cash that you can fall back on.

While the general principle is to tuck away three to six months of expenses in a savings account that you have access to (but don’t regularly touch), you’re probably not at a stage where you can realistically make this happen. For the time being, you’ll want to stash away $1,000 to $1,500. Once this is done, you can return to the issue at hand.

2. Ask the Right Questions

When it comes to the dilemma of investing or paying down debt, start the discussion by answering three basic questions:

  • How much do you currently have in savings?
  • What are the interest rates on your debts?
  • What are your financial goals?

Based on your response to these questions, you’ll proceed in a specific direction. You’ll have to use some intuition to figure out the best path.

3. Pay Down Debt

Debt is the number one priority. Ignoring debt at the expense of investing will come back to bite you.

“First things first: You should prioritize paying at least the minimum amounts due on your required debt payments on time,” financial advisor Nick Holeman suggests. “Not doing so can lead to penalties, extra interest, and higher finance charges, in addition to ruining your credit score. Negative information, such as excessively late payments or collections, generally stay on your credit report for up to seven years.”

Having said that, making minimum payments on your debt isn’t enough. At this pace, you’ll be climbing out of debt for years. You really need to dig in and accelerate the repayment schedule by paying as much as you possibly can. (This may mean picking up an extra job to increase your income.)

4. Start Investing

Once you have all your high-interest debt paid off, you can begin to think about investing. Start by investing in employer-sponsored retirement plans (if offered). Many employers offer match programs for a certain percentage of your income. This is essentially free money, so take it.

If you don’t have an employer-sponsored program, look into opening up a Roth IRA and spreading your money out over good growth stock mutual funds. Don’t invest in single stocks – they’re far too risky.

5. Never Pull Out Retirement

Once you invest money into retirement accounts, you need to act as if that money is no longer yours (until you reach the legal withdrawal age of 59 ½). Prematurely pulling money out of an IRA or 401(k) comes with a number of fees and expenses. If you think you’ll need that money to pay off debt, it’s better to stash it in a savings account. It won’t earn much, but at least it’s accessible.

Start Moving

The absolute worst thing you can do is wallow in despair. The sooner you get up and start taking action, the quicker you’ll make progress – both in terms of investing and paying off debt.

Wealth building isn’t for the passive or lazy. It’s for individuals who are willing to sacrifice now in order to enjoy financial health and well-being in the future. If you’re in debt and want to invest for the future, you’re going to have to sacrifice on multiple fronts. Keep the big picture in view and push forward with discipline and drive.

When you look back in 12 months, five years, or a decade from now, you’ll be floored by how much brighter your situation looks.