Are you struggling to manage your debt while also wanting to invest for the future? Balancing these financial objectives can seem daunting, but with the right strategies, it is entirely possible to pay off debt while simultaneously growing your investments. In this blog, we’ll explain how you can do so.
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Understanding Your Financial Situation
Before strategizing, it’s important to assess where you are financially. Here’s how you can get started:
- List all your debts along with their interest rates and monthly payments.
- Determine your investment goals and time horizons.
- Calculate your monthly income and expenses to understand your cash flow.
By getting a comprehensive picture of your finances, you can create a realistic plan for paying off debt while investing.
Prioritizing High-Interest Debt
High-interest debt, generally defined as debt that has an interest rate of 8% or higher, can quickly spiral out of control. Prioritizing paying off debt of this type is critical because interest can significantly outpace investment returns. Here are a few types of high-interest debt and some tips for paying them off quickly.
Credit Card Debt
Credit card debt is one of the most common forms of high-interest debt, with interest rates often exceeding 20%. Because credit cards are revolving, it’s easy to accumulate a lot of debt over time, which is why it’s crucial to get them paid off as soon as possible.
To do this, consider using the debt snowball method, which involves paying off debts from smallest to largest, regardless of interest rate. Here’s how it works:
- List your debts from smallest to largest.
- Make minimum payments on all debts except the smallest.
- Pay as much as possible towards the smallest debt.
- Once the smallest debt is paid off, move on to the next smallest debt.
You can also use the debt avalanche method to tackle high-interest debt. The goal here is paying off debts with the highest interest rates first, which can save you more in interest payments over time.
Paying Off Debt with Payday Loans
Payday loans are short-term, high-interest loans that can trap borrowers in a cycle of debt. Interest rates can reach up to 400% annually, making them difficult to repay. To escape payday loan debt, try negotiating an extended payment plan with the lender. You can also explore alternative financing options like borrowing from friends or family or obtaining a personal loan with a lower interest rate to consolidate and pay off the debt.
Personal Loans
While personal loans can be a great option for paying off other debts and handling emergencies, they should be used with caution. They tend to carry high interest rates, especially for those with poor credit scores. If you need to pay off a high-interest personal loan, consider refinancing to a loan with a lower interest rate.
Building an Emergency Fund When Paying Off Debt
Before making significant investments, you need to build an emergency fund. This is key to avoiding more debt should you incur any emergency expenses. It’s typically recommended to save three to six months’ worth of expenses in your fund.
How Your Fund Can Be Used
An emergency fund can help cover expenses that would otherwise derail your financial stability and cause you to incur high-interest debt. From urgent home and car repairs to sudden job loss, an emergency fund provides a valuable cushion for life’s curveballs.
Getting Started with Paying Off Debt
Don’t get overwhelmed at the prospect of building an emergency fund––it’s totally okay to start small. Set a modest initial goal, such as saving $500 to $1,000, to cover minor emergencies. From there, you can gradually increase it to cover three to six months’ worth of critical expenses.
Investing While Paying Off Debt
Once you have a handle on paying off debt and a good emergency fund in place, you can start investing. Here are some strategies to continue debt repayments while investing:
- Employer-Sponsored Retirement Plans: If your employer offers a 401(k) match, be sure to contribute enough to get the full match. This is essentially free money and it can significantly boost your retirement savings.
- Low-Cost Index Funds: Consider investing in low-cost index funds, which offer diversification and lower fees compared to actively managed funds.
- Roth IRA: A Roth IRA allows your investments to grow tax-free, and withdrawals in retirement are also tax-free, providing a major tax advantage.
Automating Your Finances
Automating bill payments can help you stay on track and avoid missed payments or investment opportunities. Set up automatic transfers for your debt repayments and investment contributions. By doing so, you can ensure consistency and can focus on other aspects of your financial plan.
Don’t Let Debt Get You Down
Building wealth while paying off debt is hard, but doable. By leveraging the strategies discussed above, you can get on track to a better financial future and ensure you have the tools you need to succeed long-term.
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. All investments involve risk, including the loss of principal.