Most people carry some form of debt. It could be $800 in
credit cards, $120,000 in mortgage, and/or $15,000 in student loans. Everyone's
debt load is different, as are the kinds of investments that you will be able
to make while in debt.
When considering how much to invest while paying off your
debt, it is more important to look at the rate of interest that you are paying
than the total you are paying. If you are paying off your mortgage at 3.5%,
that debt is growing at a very slow rate. Sure, you would save thousands of
dollars in total payment if you were able to pay it off all at once, but you
experience that loss very slowly and gradually, often over either 15 or 30
years. Student loan debt is similar in that it is also paid off with a low rate
of interest. By paying off just the minimum amount and putting the rest of your
spare money into savings
and investments, you have likely made a wise decision.
The thing you have to keep an eye on is the rates. If you
have mutual funds that are yielding 8.9% every year, and a student loan at
4.6%, you are making money faster than you are losing it. However, if you are
paying off a credit card at 23.9%, you are losing money much faster than you are gaining it with those same mutual funds.
In this situation, it is much better to kill off the big interest debt before
allocating much to your other investments.
There are two exceptions I would recommend for certain
individuals:
1)
Limited Funds in High Risk, High Reward Investments.
Of course this won't work for everyone. But some people become very skilled at
an investment form called spread betting. It's a
form of day trading where the user wagers on the behavior of markets and
stocks, whether they will grow or shrink within a certain time frame. Get it
right, and you win; get it wrong, you lose. You can make thousands of trades a
day if you want to (though I don't recommend it). If you limit your investment
to between 5-10% of your investment dollars, you may see a huge return, if
you're careful. Use the free tutorials to see how you do before you sink much
money in risky investments, despite their excellent payoffs.
2)
Everything you can spare in tax-deferred accounts.
IRAs (Individual Retirement Accounts) are a way to save money in the stock
market, but avoid paying taxes on it. You can choose to pay taxes now (and not
when you withdraw at retirement). You can also choose not to pay taxes now
(waiting to pay when you retire). Because these monies, invested in index
mutual funds, mirror the overall growth patterns of the market, you're all but
guaranteed to make money over time. You'll also have compound interest working
for you, you yields going back into the pot to swell with the rest of your
money.
Investment is tricky for people in debt. Getting out of debt
should be your first priority, unless the debt you have is very low-interest.
If you've gotten rid of your bad debt, invest away.
