If you want to start investing money, but at the same time you have loans, the legitimate question arises about how to invest, when there are debts, where to send money in the first place and what should be given priority? Obviously, both options are important, but when resources are limited, you have to give up one thing.
We suggest listening to these recommendations, which help to understand how to develop your own strategy in the matter, how to invest when there are debts and find the best solutions for yourself.
1. Pay the minimum amount for all debts
Given that your credit history is one of the most important factors in determining the level of credit confidence, the minimum payment on all currently available debts is one of the priority tasks.
The importance of this approach is to create a positive credit history. This is necessary if you plan to continue to use loans, for example, take a mortgage. A good story can help you out in some life circumstances, and a bad story can greatly aggravate the situation if you skip payments or not pay at all..
2. Consider a reliable plan
While there is a temptation to plunge into investing right now and make your money “work”, you should always stop first, think about the situation and make sure that there is enough margin in the budget for such maneuvers.
The goal here is not meticulous micro-management of personal finances and not the elimination of spending habits. In other words, you can’t just stop at the fact that you refused Starbucks morning coffee and thereby started saving. The goal is to create a working and stable system that will allow you to constantly progress without going down into the debt hole..
There are many tools available to help you do this. for instance, mobile applications for personal finance accounting.
You can also create your own spreadsheet or simply set up automatic transfers to your savings accounts and loans, thus limiting yourself from having to keep within the remaining budget and additional stress.
When conducting such reports, it is worthwhile to continue to control your income and expenses in order to understand how realistic is the ability to invest money in investments or to repay debts with their help. This is important to maintain a working strategy so that the plan continues to work, rather than complicate the financial situation..
3. Build a small emergency fund
No matter how many debts you have and what interest rates you have, it will be nice to have a small emergency fund before you deal with the distribution of funds between investments and debts.
The importance of this fund lies in the stability of life. Everyone has unexpected expenses, regardless of your desire, and the availability of cash to help them cope will allow you to continue to adhere to the plan for the accumulation of funds or getting rid of debt obligations.
The specific amount for such a fund depends on many factors, but, as a rule, maintaining it at the level of 50,000 rubles is quite enough to withstand any “black” days.
4. Pay off high interest debt
At this point, the question of how to invest when there are debts basically comes down to two variables:
• expected return on investment (percentage return);
• the likelihood of this return.
It is reasonable to assume that a balanced investment portfolio will provide long-term returns ranging from 8% to 15% (on average), but this is not guaranteed. The result can be much higher or lower, while the investment journey will be accompanied by ups and downs..
On the other hand, the profit that you get from paying off the debt is concrete and accurate. Investing extra money on credit at a rate of 20% gives exactly 20% of the profit. With the repayment of the loan you have the money that you could not use before.
It becomes obvious that among these two options, repayment of debts with high interest rates wins by a large margin, rather than investing in investment assets. If you can get a higher income from a specific financial decision, this decision will clearly be more appropriate. Moreover, this income is guaranteed, but not expected, as is the case with investments.
5. Mathematics versus emotions
• The lower the interest rate on the debt, the more you should tend to maximize personal investment simply because it is likely to make more money.
• When your loan interest rates are average in value, think about a balance sheet. By sending half of your funds to investments and half to debt, you can make progress in both directions.
• If the debt that you have is a stressful factor that prevents you from sleeping at night (in the broad sense of the word, of course), do not be afraid to set personal priorities, even if the numbers speak in favor of investing. This is one of those rare situations where you can literally buy your own happiness for money.
• Option for risky. If you understand that the potential return on investment will be higher than your interest rate on debt (even if it is high), then direct more funds to these assets. Other question only that the stock market does not give a 100% guarantee. Stocks are less reliable, but more profitable than bonds, and it is better not to bother with your thoughts on cryptocurrency in your situation..
6. Build assets after debt repayment
This is a very important point that is often overlooked. If you really want to get the most out of all the money with which you work, you will need to transfer them to investments completely, after getting rid of debts. For example, if you previously transferred 15,000 rubles a month to pay off loans, then after full payment you need to start transferring these 15,000 rubles into investments.
The reason for this plan is simple. The growth of a working investment portfolio provides the power to make a profit, and this profit must be further increased due to the constant growth in the volume of assets. This requires additional money, for example, those that you received after you repaid loans.
Of course, maximizing your long-term profit should not be the only option for choosing an action or the very first thought. The main goal of any competent financial plan is to help build a life that will make you happy. Yes, often this leads to a waste of money on things that do not give any profit at all. But, purely from a financial point of view, the movement of freed money into investments is best way to increase personal capital.
7. Find your balance
Despite the relative simplicity of several recommendations on how to invest when there are debts listed here, the issue of investing and paying off debts quickly becomes muddy and confusing. Decisions are accompanied by many doubts and worries about the wrong choice. If because of this you find yourself in a difficult situation, remember that both options are a good choice for working with money, and any progress in the financial situation is good. If you use the steps described above, correctly thinking your way, and focus on achieving regular progress, you will definitely be able to improve personal and family well-being.
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I would like to know how to invest efficiently when I have existing debt. Could you please provide a clear step-by-step guide that helps me navigate through this situation?