Investing to Get Out of Debt: What You Need to Know

Being in debt can be quite a sinking feeling. Each month, you hope to take a big chunk out of your debt, and each month you fail to do so. Either you manage to take only a small bite out of what you owe, or even worse, you watch your debts grow. Most likely, you will spend the majority of your waking hours thinking about ways you can erase your debts and have a new start on your financial life.

A Potential Path Forward

If you have thought enough about your debt problem, you may have come across the following idea at least once or twice – investing to get out of debt. For instance, you may be able to work with fix and flip lenders to get into the real estate market. Rather than just using all of your available money to pay down your debts, you may be able to invest that money – perhaps along with a loan – and make a greater rate of return than you are paying in interest on your debts. When it works out that way, you’ll be better off investing, and you can pay down your debts faster.

The key here is what was stated in the previous paragraph – you need to compare the return on your investments to the interest you are paying each month. Are you able to beat that interest rate with what you make on the investments you have selected? If so, you are on the right path. If not, you’d be better off paying your debts with that money, as the investments are effectively putting you in a bigger hole.

Don’t Make Things Worse

It’s important to understand that you need to keep up with at least your minimum debt payments while you consider your investment options. If you do decide to invest as a way to get out of debt, you still need to keep all of your accounts current on a monthly basis. Letting your payments fall behind would not be a good financial strategy, as you would rack up late fees and your credit score would take a dive. The money you use for investments should be the money that would have otherwise been used to make extra payments beyond the minimum due on your debts every month.

We can’t tell you whether or not investing to get out of debt is a good or bad idea in your situation. It is a viable idea for some, to be sure, but so much will depend on your specific circumstances. Keep an open mind, carefully consider the numbers on all of your options, and make the decision that is in your best interest moving forward.

 

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