This question came from a reader the other day. He said:
“I just watched your recent investing videos. What are your thoughts about investing while in debt? We’ve been going crazy paying off our debt, which has been great, but then I see other things that make me wonder if I’m missing out on some investing.”
There’s no black and white answer here, but I want to look at four different considerations for people in debt who are thinking about investing.
1. What interest rate are you currently paying?
For most of us, the best investment that we can make is to pay down debts with high interest rates.
For example, if you are paying 20% on your credit card, any money you contribute toward paying down that debt gets you a guaranteed, risk-free, 20% return on your money.
If you consider investing while in that kind of debt, ask yourself: Can I beat a guaranteed 20% return? If you ever find any way to invest your money and earn a guaranteed 20%, it’s most likely a scam. But if it’s not a scam, you have to tell me. I would definitely want to know about that!
The reality is that most investors are tickled pink if they can just get a 10% or 12% return on their money. That sort of return, if you can find it at all, comes with a decent amount of risk.
Remember, paying off debt is a guaranteed return on investment.
2. How long do you want to be a servant?
Proverbs 22:7 says, “The borrower is servant to the lender.” Some translations say, “The borrower becomes the lender’s slave!” This felt very, very true to me when my wife and I first got married.
We were $46,000 in debt. I felt like I was in bondage. I felt like the creditors—Chase, Mastercard, and the bank who had our car note—controlled me. Owned me. Being able to pay off that debt felt so, so liberating.
We’ve been able to make some money investing, and it’s been a whole lot of fun. But the relief that has come from paying off our debt far superseded any of the joys of investing.
3. Are you ready to learn?
When you’re ready to invest, begin by investing in your education. When I first started learning about investing, I created some mock portfolios. I pretended to make certain investments and watched to see how my portfolio would have performed. It was fun.
But the reality is this: everything I’ve really learned about investing has been when I had skin in the game. When you actually put some money in, you really pay attention. If you are waiting to pay off a lot of debt before you start investing, ask yourself this: What will it cost me to delay my education?
The lessons you learn from these investments — even (and especially) the ones where you lose money —are going to be lessons you’ll have for the rest of your life. They’re ultimately going to help you in every investment decision you make.
Though this may not be a good reason for someone in debt to start investing today, it’s something to consider. And remember, you don’t have to invest all your money to learn some of those lessons. We’ve created some videos that show you how to get started investing with very little money.
4. Are you more like the tortoise? Or the hare?
Do you remember the old children’s story about the tortoise and the hare? The tortoise and the hare were in a race. The hare was impatient, but the tortoise took his time. The tortoise won, because “slow and steady wins the race.”
Which are you? Are you impatient and easily distracted? Do you find yourself constantly jumping from one thing to the next? Then buckle down and focus on eliminating your debt. Give it everything you have and knock it out before you get distracted by the next “big thing.”
Is your investment style slow and steady like the tortoise? If you can stick with a wise investment strategy for an extended period, then you may be able to get some of the benefits of learning to invest while still making progress on your debt.
Investing while in debt: What’s your strategy?
Don’t forget, paying down your debt is a guaranteed return on investment. If you decide to start investing while you’re in debt, make sure your return will be higher and better than the interest rates you’re currently paying on your debt.
