For as long as you can remember, you’ve been given advice to save and invest your money, right? After all, that’s how you plan for the future. But, how are you supposed to save and invest your money when you are faced with debt? Debt is the leading obstacle that prevents people from growing their assets.
Student loans, mortgages, credit cards, and car payments are some debts facing Americans today. If you are looking at your debt and wondering how you will ever get around to saving money, don’t panic. There are still ways to save and invest money when you’re faced with a great deal of debt.
Know Your Debt
The first step to invest your money, while balancing your debt, is to understand what kind of debt you have. At first glance, investing money with debt might seem as difficult as finding a needle in a haystack. The truth is it’s a lot easier to do if you understand what type of debt you have and make a solid plan to create a balance between your savings and your debt payment.
The key to balancing debt and savings is to make more return in your investments than the interest you pay for your debt. To do this, you need to distinguish the types of debt you have. Debt generally falls into one of three categories:
- High-interest debt is usually your credit cards. Anything that has an interest rate above 10% is considered high-interest debt. This type of debt is handled best when you pay it down before you invest your money. Otherwise, you will be trying to bail out of a sinking ship with a coffee mug.
- Low-interest debt usually refers to your personal bank loans, bank line of credit, or car loans. The interest rates still have some performance pressure from investing but are much easier to make a return on than high-interest debt. Low-interest debt is generally described as prime plus or minus a certain percentage.
- Tax-deductible debt is as good as debt can get. This includes student loans, mortgages, business loans, investment loans, and any loans that bring you interest from tax deductions. Tax-deductible debts have low interest and make it easier to build your investment portfolio while you pay them down.
The rule of thumb is to pay off high-interest debt before you even think of investing money. If you have identified low-interest or tax-deductible debt as a source of your debt, and are interested in saving or investing money, your next step is to plan for your investment.
Make a Plan
In the long term, starting a portfolio despite debt can be beneficial because of time. While you may be investing only a small amount of money, you are giving that money time to mature. Part of the plan for saving money while in debt is to make your loan payments in the place of low-risk or fixed-income investments. So, instead of making a traditional portfolio with high and low-risk investments that change with your age and your risk tolerance, you will lessen your debt load and see a return with the reduction of your interest payments.
There will be more than one portfolio required to get a return on invested money with debt. The rest of your portfolio should focus on higher-risk, higher-return investments like stocks. It’s important to note that even with very low-risk tolerance, you will still want to put a percentage of your money into the market to get returns. And, sometimes high-risk tolerance might not allow you much money to invest because of required monthly payments for your loans. Even with conservative portfolios, your goal is to invest some amount of money into high-risk and return investments. As your circumstances change, and your debts become smaller, you will reassess your options and adjust your distributions.
The bottom line is that despite debt, there are ways to save and invest money successfully if you have the right plan. For many people with debt, it seems like a normal financial life is out of reach. It can be a difficult task to stay focused and consistent with long-term debts. When you have a goal in mind, and follow the plan to achieve your goal, you can enjoy the psychological benefits of investing your money. With a modest portfolio, you will gain the assurance you need to push forward through your debts.
For those with debt, knowing you can build a portfolio and save and invest money is like a light at the end of the tunnel. Talk to a professional portfolio management team to determine a plan that is right for you. You hard work and consistency will pay off at the end.