Written by Today, we answer the question, should I invest while I still have debt? When it comes to investing and building your financial future, you need to have your money working for you. Money working for you is the only way achieve true freedom. The freedom that allows you to live your life how you choose, with who you choose, doing what you choose. Those are the wonderful experiences we all seek to create.
The problem most of us face is we realize the system is designed to create lifelong employees too late. This is what I call the four freedom. The first freedom is mindset freedom. You achieve that the moment you stop allowing yourself to be a pawn in the system. The next step is debt freedom. More times than not, we realize the system’s plan after we’ve already started building debt. Once we are out of debt, the third freedom is financial freedom. As I mentioned earlier, true freedom is tied to your ability to put money to work. The last step is generational freedom. It is not enough for you to crack the code, you want to share this message with your loved ones. By sharing the wisdom and experiences you have gained, you can shorten their learning curve.
Lifestyle built on active income
When your house, car, and lifestyle are tied to a job you actively work, you must continue working to maintain your lifestyle. This isn’t a concern in the early-going. It is not until we realize our passions and interests that it becomes a problem. When you have to choose between your passion and your obligations, our obligations often win. If you pursue your passion and make less money, you won’t be able to afford your payments.
Me personally, I did it completely wrong at first. I wanted freedom so badly, I quit my corporate job. I had a great job managing the pricing department of a $2B company. Needless to say, it didn’t go well. I just thought I was going to figure this out before I hit rock-bottom. Because that is what everyone says. That you are going to spread your wings and the light is going to shine from heaven. Well, that didn’t happen. lol. I landed in those rocks. And I had the cuts and scrapes to prove it. We ended up having to sell our house and our cars. We were living in an apartment and things for extremely difficult for us. I remember asking myself, what am I missing here? Freedom is important, but for some reason nothing is working. What I didn’t realize is that unless you have an income being generated by some other means than you working, you must keep working.
Should I invest while I still have debt?
To answer the question, I generally look at this question two ways. From a financial standpoint, if you have credit card debt that has a 30% interest rate. Yet, your investment only has a 10% return. That means you are losing money by allocating your finds to investments instead of the debt. If you were to pay off the debt, that would be the same as you making 30% on your money. Because if you didn’t pay the 30% debt, you would be charged 30%. Therefore, from a purely financial standpoint, paying off the debt is the best use of your money.
Now, if you had a 5% debt and could generate a 10% return, then it would make financial sense to invest your money. You can then allocate 5% of your returns as debt payments and the other 5% towards new investments. You would consider this the same as having your cake and eating it too. Your money is working to pay off your debt, while also working to build your financial freedom.
It doesn’t have to make perfect financial sense
There are times where we I recommend taking an approach that doesn’t make perfect financial sense. When someone tells me there debt is crippling and making it hard for them to sleep, I tell them let’s get rid of the debt. Who cares about the interest rate when you can’t sleep? Go ahead and pay off your debt first. Give yourself peace of mind. You can worry about investments at a later time.
Some will tell me they spend so much money, that they don’t trust themself. If you feel you have poor spending habits, then let’s start putting something away. Even if it is $100 a month. Let’s build the habit of not spending all of our money. What you will realize is in 10 months, you will have $1,000. While some will say that’s not much money, let me ask you a question. Would you walk past an envelope on the ground filled with $1,000? Of course not. In fact, I don’t think you’d walk past $100 on the ground. Well at least I know I wouldn’t.
The reality for most Americans
The reality is the majority of Americans say they don’t have $1,000 to spend on an emergency. So it stands to reason if you can put $1,000 away for the future, you are doing big things. The greatest benefit is you now know it’s possible for you to save $1,000. And once you know it’s possible, you will be hooked. You will be pondering ways to save even more each month. Where the question isn’t can I save, but how much can I save.
Final thoughts
Whether you should invest while still having debt depends on your personal situation. From a purely financial sense, if you’re able to get a return that generates more than it costs to pay off the debt… do it. That way you can pay off your debt and still have some money left over. If the interest on your debt is higher than the interest you can earn from investing, it makes sense to pay the debt off first. Yet, if debt causes you stress and discomfort, then you should strongly consider paying off your debt. Everything doesn’t have to make perfect financial sense. Some things just need to be reasonable. It is reasonable to pay off your debt. It is reasonable to invest your money. In many situations, peace of mind is worth the cost.
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