Tuesday, February 5, 2013, AM | Leave Comment
Investing when you’re knee deep in debt does seem insane and impractical. However, if done correctly, it is a smart move that, sadly, only a few even consider when in such a situation. Debt is a common factor that can hamper growth of assets and potential investments. It is arguably the biggest challenge to deal with, regardless of the type of debt you owe.
Nevertheless, you can still balance your outstanding credit through a smart approach in saving and investing.
Here’s what you should know:
Kinds of Debt
In a general sense, having debt can make it hard for investors to move their money. In some instances, investing while in debt is a risky option.
For example, if you have debt on your line of credit at 10% interest, your investments should generate over 10% to be deemed profitable, otherwise it is simply a waste of both time and money.
The trick is knowing the kind of debt you owe prior making any investments. Kinds of debt include high-interest, low-interest, and tax-deductible.
Debt elimination, especially of something like a mortgage that will require long-term capital, consumes too much time and money. In the future, the time you lose is valued more than the money you actually paid.
You would want to give your money as much time as possible to build up. This is one of the main reasons why you should begin investing amid a debt situation.
Your investments may be minute at first, but it will accrue and pay out more than the investments you would have made in the future as these small investments will have more time to compound.
How to Invest?
Rather than creating a conventional portfolio with high- and low-risk investments based on the age and tolerance, the concept is to make your loan premiums in the position of low-risk and/or fixed-income investments.
This connotes that you will be finding returns on your investments while your outstanding debt and interest payments are tapering down. The rest of your portfolio must concentrate on the higher-risk yet higher-return investments like shares.
If your risk tolerance is considerably low, the mass of your investing capital will still be going towards the payment of your debt. Although, there will still be a percent directed into the market to generate ROI for you.
The Bottom Line
It is indeed possible to invest in spite of having a debt crisis. The most vital question to ask yourself is whether or not you should invest it. The answer to this question is personal, and will rely on your risk tolerance.
There is no doubt regarding the potential gains from getting your cash into the market asap. Unfortunately, there is also no way to guarantee that your investment plan will perform as expected or as needed. Such results rely on how effective you are as an investor.
The most important advantage of investing while in debt is psychological. It can be annoying and disheartening to pay down lifelong credit if you are not the kind of person who focuses on a particular task and sees it done before anything else.
Ben Halluska writes about finance, accounting and business. His best work highlights the top accounting schools http://www.bestaccountingschools.net in the US.