Investing While Paying Off Debt

Learn why it might make sense for you to still invest money while paying off debt

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Sep 20, 2017
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The common sense of the typical investor dictates that investments not be made while debt is being paid off. For many people it makes perfect sense. After all, your 9% investment returns from this year are more than eaten away by the interest on your debt which accrues at 17.99%. Judging by the numbers, the debt-laden investor is trying to steer a sinking ship. It’s no way to generate wealth.

But this isn’t the only side to this story. Intelligent thoughtful investors decide to invest while still paying off debt for a number of reasons. In fact, if you are able to do it well enough it could create a greater portfolio in the long term, or even help you pay your debt off much sooner. Here are several scenarios that would warrant investing while still in debt.

The obvious reason one might invest while in debt is when the debt has low interest. Examples include mortgage and student debt. Most sensible financial minds don’t advocate paying off low-interest debt aggressively because the same money used to erase the debt could be used to generate returns faster than money is lost through debt interest.

Another reason some people invest while in debt is that they’re committed to a bigger plan. For example, individuals earning $45,000 per year might be devoted to saving their annual IRA contribution limit of $5,500, no matter what. They know that this is the best way to take advantage of the compounding possibilities of this tax-protected investment tool. It’s true; the larger the balance early on in the life of such an account, the greatest possible returns it will create in the long term. Even though this individual may be technically canceling out returns while debt still accrues on the debt, this course of action might possibly be justified. Of course, no one should invest at the total expense of debt repayment as this will have much worse effects than ruining your good credit score.

One reason people invest while in debt is because they’ve found a great opportunity. Perhaps it’s a business, perhaps it’s a security, perhaps it’s an opportunity that will only be available once in a lifetime. For people who truly know that to let such an opportunity pass by would result in “the one that got away” syndrome, investing while in debt makes sense. Of course this is a subjective and personal decision for which a specific recommendation cannot be made.

The other reason why you might invest while in debt is that you are wealthy and you will be able to pay off your debt in good time, just as soon as you get certain investments out of the way. If you are in this situation, you probably don’t need this guide though.

As you can see, there are certain circumstances that make investing with debt make sense. It is still the exception to the rule, but doing this the right way could create much greater wealth in the long term, in spite of the course of action normally recommended.