Should you invest when you are in debt?

Investing your money is a great way to build wealth over time, but what happens when you have consumer debt?

Should you still be investing, or should you focus solely on paying off your debt?

In this blog post, we’ll explore the pros and cons of investing while in debt, in order to help you determine whether or not it’s the right decision for you. 

The most important thing to remember about investing when you’re in debt is not to start investing unless you can afford to do so while also making your debt repayments in full.

Failure to keep up with credit card, loan or mortgage payments can seriously affect your credit rating and ability to use credit in future.

It is trickier at the moment with the Bank of England base rate higher than in recent years too, making debt more expensive to take on.

Beyond that, here are some of the pros of investing while in debt. 

1) Time is on your side 

Time is on your side when you’re young and have a long investment horizon.

Investing while carrying debt can be a wise decision if you have a long-term horizon, as it allows you to take advantage of compound interest and earn higher returns that can cover the interest you’re paying on your debt.

However, you may need to take on more risk and invest in higher-risk assets like stocks or real estate. 

2) Diversification 

Investing your money in a variety of assets such as stocks, bonds, and real estate can help diversify your portfolio and spread out your risk.

This can help protect you from potential losses and minimise the impact of any one investment performing poorly. 

3) Take advantage of market opportunities 

Investing while in debt can also allow you to exploit emerging market opportunities.

For example, if the stock market experiences a dip, you can invest your money at a lower price and earn higher returns once the market bounces back. 

Drawbacks

While investing has some pros, there are also many cons of investing while in debt. Some of the cons will now be explored. 

1) Increased risk 

Investing always involves some level of risk. If you’re in debt, the risk of investing can be even more significant.

This is because if you lose money on your investments, you could end up in an even worse financial situation than you were in before. 

2) High-interest debt 

If you have high-interest debt, such as credit card debt, the interest rates on your debt are likely to be much higher than the returns you could earn from low-risk investments.

This means that any money you invest may need to earn more returns to cover the interest you’re paying on your debt, making it difficult to achieve a positive return. 

3) Missed debt payments 

Investing can require a significant amount of money, and if you’re using money that you would have otherwise used to pay off your debt, you may end up missing debt payments.

Doing this can result in additional fees and penalties and damage your credit score, making it harder to access credit in the future. 

4) What is the opportunity cost? 

When you invest money while in debt, you’re essentially using your money for something other than paying off your debt.

This means you’re missing out on the opportunity to pay off your debt faster and save money on interest payments.

Depending on the interest rate on your debt, the potential returns you could earn from investing may not be enough to outweigh the savings you could achieve by paying off your debt. 

5) Psychological stress  

Carrying debt can be stressful, and investing while in debt can add an extra layer of stress.

This is because investing involves risk, and if your investments aren’t performing well, you may feel anxious or worried about your financial situation.  

In conclusion, investing while in debt can be a smart decision if you carry low-interest debt and have a long time horizon. However, if you’re carrying high-interest debt, it’s best to focus on paying off your debt first.

Remember to always consider the risks involved with investing and consult a financial advisor if you’re unsure about your investment decisions. 

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