While it may seem contradictory, it is possible to pay off debt and create an investment portfolio at the same time. In fact, it’s essential because high-interest debts greatly offset the real value of your investment portfolio. If your portfolio is earning a 10% return each year, but you are paying 20% in interest on your debts then you’re really not making money.
Prioritize Your Debts
Not all debts are bad. For example, if you borrow 170,000 at 3.5% to buy a property you’re going to rent out, that debt is good as long as you see a positive return on your investment. However, if you buy a car at the same interest rate, it is bad debt because cars are depreciating assets. Everyone will tell you that credit card debt is the absolute worst, and they are right. Credit card debts are number one on your list and should be paid off ASAP. If you can’t pay them off, try negotiating settlements, or considering going to a credit counselor for help. Prioritize your other debts and pay off the high-interest debts first, save the low interests debts for later when you are in better financial shape. Keep any debts that are investment related and earn a good rate of return. The best way to figure out which debts are really killing you is to compare the annual expense of your interest rate to the annual return on your investments. If the cost of the interest is higher, you need to eliminate that debt.
Unless you receive a large, unexpected lump sum of money, you are going to have to make changes in your life if you want to accomplish your goals. You’re going to go have to cut back on thing like entertainment expenses, buying things you can life without, and generally live as frugally as possible without torturing yourself. Go over your monthly budget and figure out where you can scale things down. Once you figure out the amount of money you have to split between debts and investing. Based on your particular situation, decide how much of that money you’re going to apply to your debts and how much you can afford to invest.
While you’re paying off debt, it is best to stick to low risk stock market investments and keep the big picture in mind. You can afford to lose money while you’re squeezing every cent you can out of your budget. You may get a hot stock tip, but if you are in the middle of trying to pay off debts, you would probably be better off investing that money in savings bonds. Stick to low risk, moderate yield investments or you could end up in a serious financial crunch.
It is more difficult to create an investment portfolio if you have a high amount of debt, but it is not impossible. You have to be willing to not only change your investment strategy, but to change your lifestyle as well. However, if you do, you will create a stable portfolio that you can invest more into after you pay off your debts.
About the Author: Bibi Abdullai has been workign on her own debt repayment strategy for years. She recently went to a stock advisory service for advice on building her own investment portfolio and is now funneling all she can towards her debts and investments.