Having debt can be a major obstacle towards becoming wealthy. Investing with debt is tough because debt can compound quickly. You need to find the right balance.
I look at the different types of debt in this post, then give you strategies for each. But it’s up to you to implement. It’s your debt. Hiding from it won’t fix anything.
If You Have Any Debt at All..
You NEED to listen to Dave Ramsey. He has a podcast and radio show that is one of the most popular shows about money. Dave has helped more people get out of debt than anyone else I’ve ever heard of.
Why is he so good at it? The guy knows how to inspire people. He’s been bankrupt before, and has been helping people for over 15 years.
You hear people who scream for joy in every episode. They worked Dave’s plan, and now are debt free. Just by listening along, you’ll find plenty of inspiration and strategies you can use without having to pay for anything.
I CAN’T STRESS THIS ENOUGH. This show will change your life for the better.
Now, What About Investing with Debt?
Ok, so you promise you’re going to listen to the Dave Ramsey show. Now what about investing with debt?
You can do a little bit of investing while you have debt. But you must be very intentional.
Your investing situation all depends on the kind of debt you have. I’ll talk about each, and give you ideas for an optimal balance of debt and investments.
Credit Card Debt
If you have any credit card debt at all, you must pay that off first. There’s no stable investment out there that is going to keep up with the crushing interest rates of credit cards. I’d focus on getting out of credit card debt first, before worrying about investments.
Trying to invest while having credit card debt will be like trying to run in quicksand. You will get disappointed, won’t see great results, and will probably quit. If you have a lot of credit card debt, I’m not the right person to help you right now. Go to Dave Ramsey’s website and listen to his free podcast.
Here’s the good news about mortgage debt, you’re ok to invest with it! Not only is interest towards your mortgage tax deductible, but you need a place to live anyways. If you aren’t paying mortgage payments, then you’re probably paying rent payments. Just make sure your mortgage payments are somewhere between 25 – 30% of your take home pay.
This type of allocation gives you plenty of room to invest. As long as you’re not spending everything else you have, you’ll have money that can grow and make you more money. Getting serious about investing when you only have mortgage debt is a very profitable place to be in.
Student Loan Debt
This is exactly where I’m at right now. All I have left is student loan debt, and so I’m faced with the popular struggle: do I invest or pay off student loans?
This kind of debt really depends on how much you have, and how high the interest rates are. If your debt amount is more than half of your annual income, or the interest rates are higher than 8%, you should probably be focusing on all your money on debt. This much debt will never be paid off unless you focus intensely on it.
However, if your debt doesn’t meet those conditions and you know that you can pay it off soon with focus, then it’s ok to be investing some of your money instead of paying on debt. You need experience with investing before you can assume success. Investing is like any other skill that needs to be practiced and honed.
You’re not going to be successful in investing with just raw talent or natural instinct. That’s not how the game is won. You will be successful through long periods of constant learning and experience. If your student debt load isn’t dragging you down, you can try investing with debt. You’ll stay interested in investing longer and will have explicit results and experiences to learn from.
Car Loan Debt
You probably won’t like to hear me say this, but you should really be trying to pay this off as soon as you can. Car debt is bad debt, and it’s often what keeps someone from becoming wealthy. Everyone seems to think that it’s normal to have a car payment, but I’m telling you this is what keeps people who are in the middle class staying in the middle class.
Car loan debt is really bad for your wealth. An expensive car is basically a toy that loses value every year. You can get the same function in your life with a cheaper car that is paid off. The extra difference in car loan debt can build up quickly in good investments. I’d sell that expensive car, or hold off investing until it’s paid off. If you need help getting out of this car debt quickly, listen to the Dave Ramsey show.
If you want to follow the crowd and do what everyone else is doing, you can just disregard this post. But consider this, wouldn’t everyone be rich and wealthy if getting into debt and having an expensive car was the right thing to do? Why are only 4% of Americans millionaires? I’ve showed you before that you can become a millionaire by investing. It’s very possible. But are you willing to take those steps?
**Investing with Debt – Wisdom Wednesdays #21**
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