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Invest your money is important for creating wealth. But you need to make sure you’re ready before you start using your money to buy investments. If you have a lot of credit card debt, you may not be able to invest that much.
How do you decide if you should focus on using your available money to pay for your credit card or if you had to invest at least part of it for the future? Here is what you need to know.
When it makes sense to invest with credit card debt
Invest when you have credit card debt is often not the best solution due to the high interest rates on credit cards.
When you have a limited amount of money, like most people, you need to decide how best to use it to maximize the return on your investment. In most cases, paying off credit card debt will provide a better return on your investment than anything you could do with the money.
Placing your money on the stock market, for example, would realistically provide an average annual return of around 10% if you were to build a diversified portfolio with reasonable risk. Chances are, your credit card has an interest rate well over 10%. If you have a choice between using your extra money to pay off credit card debt that charges you 17% interest, or investing to potentially earn an average rate of return of 10%, credit card debt should clearly be your thing. goal.
The only exception to this investment rule
There is one exception to this rule: if your employer makes a matching 401 (k) contribution when you invest in your occupational pension plan. If your employer matches the contributions you make, that’s free money. The specific return you get will depend on the percentage of contributions equal to that of the company, but it is common for employers to match 50% or 100% of contributions up to a certain percentage of your salary. So investing enough to earn the entire employer could give you about a 50-100% return on your investment.
If you have this option, it makes sense to invest enough in your 401 (k) to earn your employer. You can do this with your available money after paying the minimum on your credit card debt. Paying the minimums is first necessary; Otherwise, you could damage your credit and affect your future ability to borrow, live where you want, or find work. Then, with all that is left after you pay the minimum on your cards and get the employer match, you’ll want to focus on paying off your credit card debt as soon as possible by making the extra payments as large as possible. .
While paying off credit card debt doesn’t sound as exciting as an investment, it will likely help improve your financial situation in the long run. The more money you invest to free yourself from credit card debt, the sooner you can pay off your balance in full and free up tons of free cash to start investing in assets that can help you build wealth. over time.
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