Paying Off Debt? Here’s Why You Should Still Invest

Paying off in debt and drowning? You’re far from alone. A wealth of scary statistics suggest that more Americans are burdened with debt than ever before.

Millennials owe a staggering sum of about $1.5 trillion in federal student loans. Meanwhile, about 77 million Americans (or about 35 percent of adults), have a report of debt in collections (meaning they have non-mortgage bills such as a credit card balance or a medical or utility bill that’s more than 180 days past due), according to the Urban Institute. According to a CompareCards’ survey, about 35 percent of cardholders kicked off 2020 with more credit card debt than they had at the start of 2019. Households with revolving credit card debt owe nearly $7,000, which costs them about $1,100 in annual interest payments, a NerdWallet study suggests.

But debt shouldn’t necessarily stop you from reaping the benefits of investing sooner rather than later. If it’s financially feasible for you, it makes sense to tackle debt and invest at the same time.

Why You Should Invest Despite Debt

We get it: Debt is stressful. We don’t blame you. Most Americans feel stressed about their finances, according to research by the American Psychological Association. And most Americans worry about their financial futures, according to research by John Hancock Financial.

But nearly one in four Americans report having more credit card debt than emergency savings, Bankrate data suggests. About six in 10 Americans don’t even have enough in savings to cover a $1,000 emergency like a trip to the ER or a home repair. In fact, Americans are actually twice as likely to have accumulated $5,000 to $25,000 in debt than personal savings, shows a study by Northwestern Mutual.

But the same study found that one in 10 Americans believe that they’ll be in debt for the rest of their lives — and you can’t wait an entire lifetime to start investing. Investing early means that, while you pay down debt, you’ll grow your finances for your future.

Investing early has long-term benefits because your money grows over time and outpaces inflation — which your money wouldn’t do sitting in a savings account. This means that, if you focus all of your efforts on paying off your debt without investing any of your money, you may end up actually losing dollars on a missed opportunity.

3 Strategies to Tackle Debt

Here are some strategies to dwindle your debt so you can start paying it off and having more to simultaneously invest without breaking the bank.

1. Attack your lowest balance first.

One way to make debt seem far less intimidating is by tackling one balance at a time, starting with the smallest amount. For example, perhaps you have several student loans — one is about $800, one is about $3,000 and one is about $5,000. Focus on knocking out that $800 first; this milestone will keep you motivated to pay off the remaining loans. This is largely known as the “Snowball Method” because the idea is that, the more balances you pay off, the more momentum you’ll pick up.

Dave Ramsey, author of The Money Makeover, is a big proponent of paying off debt in this way. In his book, he argues that paying off debt is largely a mental game, and you need the satisfaction of those easier wins to keep you chugging along in the right direction.

2. Focus on paying off your debt with the highest-interest rate first.

While small wins can help you build up some momentum, manyfinancial advisors agree that paying off your balance with the highest interest rate first makes the most financial sense. By paying off this balance first, you spend less time accruing the high interest.

For example, if you have two credit cards with $10,000 of debt on each, but card one has a 10 percent annual interest rate and card two has a 15 percent interest rate, you’ll save yourself money by paying off card two first. That’s because the second card will charge you $1,500 in interest, while the first card will cost you $1,000.

This strategy is widely known as the “Avalanche Method” because you end up with great debt reduction. The challenge with this method, however, is that it can take a long time to feel as though you’re making a dent in your debt — and that, of course, can become discouraging.

3. Consolidate your debt by getting one personal loan with a low interest rate.

If you’re easily overwhelmed by keeping tabs on all of your debt, this option may work well for you. Taking out a personal loan to consolidate your debt could simplify your finances and lower your interest rate. If you transfer your balances to a loan (or another credit line) with a very low or even a 0 percent interest rate (at least for the first few months), you’ll probably save yourself some money on all of the interest you’ve been accruing. But first make sure that your credit score is high enough to snag a loan with a low enough interest rate that consolidating makes sense.

That said, consolidating your debt doesn’t pay off your debt. You still need to be prepared to pay off this loan and not dig yourself a deeper ditch. For example, if you take out a loan to consolidate debt from credit cards, you still have all that debt. And you have to be careful not to spend even more since you’ve ultimately transferred the debt off your cards, giving yourself more lines of credit.

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