Should You Invest If You Still Have Credit Card Debt?
Investing your money is important for building wealth. But you need to make sure you’re ready before you start using your money to buy investments. If you have a lot of credit card debt, you may not be able to invest that much.
How do you decide if you should focus on using your available money to pay off your credit cards or if you should invest at least some of it for the future? Here is what you need to know.
One Email a Day Could Save You Thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
When it makes sense to invest with credit card debt
Investing when you have credit card debt is often not the best solution due to the high interest rates on credit cards.
When you have a limited amount of money, like most people, you need to decide how best to use it to maximize the return on your investment. In most cases, paying off credit card debt will provide a better return on your investment than anything you could do with the money.
Placing your money on the stock market, for example, would realistically provide an average annual return of around 10% if you were to build a diversified portfolio with reasonable risk. Chances are, your credit card has an interest rate well over 10%. If you have a choice between using your extra money to pay off credit card debt that charges you 17% interest, or investing to eventually earn an average rate of return of 10%, credit card debt should clearly be your thing. goal.
The only exception to this investment rule
There is one exception to this rule: if your employer makes a matching 401 (k) contribution when you invest in your occupational pension plan. If your employer matches the contributions you make, that’s free money. The specific return you get will depend on the percentage of contributions equal to that of the company, but it is common for employers to match 50% or 100% of contributions up to a certain percentage of your salary. So investing enough to earn the full employer could give you about a 50-100% ROI.
If you have this option, it makes sense to invest enough in your 401 (k) to earn your employer. You can do this with your available money after paying the minimum on your credit card debt. Paying the minimums is first necessary; Otherwise, you could damage your credit and affect your future ability to borrow, live where you want, or find work. Then, with all that’s left after you’ve paid the minimum on your cards and got the employer match, you’ll want to focus on paying off your credit card debt as soon as possible by making the extra payments as large as possible. .
While paying off credit card debt might not sound as exciting as an investment, it will likely help improve your financial situation in the long run. The more money you put in to free yourself from credit card debt, the sooner you can pay off your balance in full and free up tons of free cash to start investing in assets that can help you build wealth. over time.