A Simple Guide to Investing While in Debt

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It’s common knowledge that you need to spend money to make money. However, this does not mean investments are only for the financially stable. You can be in debt and still make some substantial investments.

Before getting to the ‘how’, let’s see why you need to make investments.

Higher Long-term Returns


Investing involves putting your money to work with the aim of gaining higher returns in the long run. Unlike a savings account where the interest rate is fixed, different types of investments carry varying risks and returns. The higher the risk of the investment, the higher the potential returns will be.

Wealth Creation


You do not create wealth by saving, but by spending money on income-generating assets. The money earned from the investment can help clear the outstanding guaranteed online loans or you can choose to re-invest it and grow your portfolio.

It Protects You from Inflation


With the continuous increase in the cost of living, holding your money in cash works against you. Its purchasing power reduces over time. On the other hand, the returns from a quality investment increase the value of your money.

You Can Achieve Your Financial Goals Faster


When you have financial goals such as building a retirement or college fund, investing the money can get you there faster through the power of compounding. For instance, investing $1000 and getting $100 in returns at the end of the year gives you $1,100 which you can re-invest and have $1,210.

Like mentioned earlier, investment requires that you spend money. If you are drowning in debt and your credit score is poor, getting an investment loan may prove impossible.

Here is what you can do.

Increase your income


If you are always left at zero or in debt after paying for all your expenses, it may be time to look for a better paying job. Alternatively, get a side hustle or evening job. In simple terms, find something to supplement your income and use the extra money to invest.

Cut Expenses


You do not have to make an extravagant change in your life to increase income, something as simple as having food or coffee at home instead of buying can save some money. Watch where your money goes, according to a survey by NerdWallet, 49% of the respondents reported that their emotions were to blame for their overspending.

Once you have some extra money, find an investment that will not strain you financially, such that you are able to repay your loans while still taking steps towards financial security.

Here are a few you can try.


  • Stocks



Stocks are some of the most liquid investments you can make. You can quickly sell the stock as soon as you need the money. Check the performance of the company before committing your money, the value of the stock will vary with the profitability of the company.

The DRIP (Dividend Reinvestment Plan) is suitable for those with a strained budget. By using DRIP, you can buy a small amount of stock and use subsequent dividends to buy additional or fractional shares in the company which eventually builds up to a sizeable investment. Some companies offer DRIP to their existing shareholders eliminating the cost of using brokers.   


  • Bonds



Bonds are a type of investment that involves lending the bond issuer an amount to help it raise capital. The bond issuer returns the borrowed amount with interest. Bonds are issued by governments and companies.

The bond issuer gives a specific time period when interest will be paid and the maturity date of the bond. The interest rate is usually higher than what banks offer on savings. Besides making money from the interest earned, you can sell the bonds in the market at a price higher than its face value.


  • Certificate of Deposit



A certificate of deposit is often offered by commercial banks with a fixed rate of interest and a specific maturity date. Withdrawals are restricted until the set maturity date when the principal and interest can be withdrawn or renewed. CODs offer higher returns than the regular savings account.

To get a higher return, invest in a long-term Certificate of Deposit. Aim to invest money you do not need in the short term since the withdrawal of funds before the maturity date attracts penalties that reduce your returns.


  • Mutual Funds



A mutual fund refers to a collection of funds from investors. The money, managed by a professional is invested in various stocks, bonds and assets creating a diversified portfolio. Each investor is equally affected by the gains and losses of the securities in the fund.  The value of the fund is determined by the average performance of all the securities.

Mutual funds are an excellent choice for small investors, it provides a diversified and professionally managed portfolio which would cost a leg and arm when done individually. The returns may be affected by annual fees and commissions but is a small price to pay for an excellently managed portfolio.


  • Exchange-Traded Fund



An ETF is a collection of a variety of securities such as bonds and stocks and is traded as a single security in a stock exchange. It can hold securities in various industries or a single industry, or it can focus on securities from companies in a specific country or take a global scale.

An advantage of investing in ETFs is the reduced expenses due to the decreased need for brokers and the resultant brokerage commissions. There is only one transaction – to buy and sell. An ETF can be passively or actively managed, the latter results in a higher expense ratio and it would be wise to compare the cost to the returns to determine if it is a worthy investment.


  • The 401K Plan



If you are employed, a 401K, which is a retirement plan, is an excellent investment option. Try to max out your employer’s contribution using the employer matching program (if your company offers it). Contribute as much as you can without compromising your debt payments. For most companies, the maximum the employer can contribute is 3% of your salary.

Contributions to the 401K are deducted before tax deductions and invested, with your authorization, to a fund which could consist of bonds, stocks, and money market investments. Withdrawals before attaining the retirement age are restricted by complex rules and heavy penalties, usually 10%.   

In Conclusion

Being in debt does not mean you should forget about securing your future. A regular savings account does not count much; you need an investment that grows your money. There are different investment plans that allow you to start small and gradually grow your portfolio. Even as you invest money, ensure you are paying every debt adequately and on time.

Try to stick to the low-risk types of investment. With debt in your hands, you cannot afford to risk losing any money. A great way to start is with stocks, 401K, bonds, mutual funds, ETFs, and CODs.

With time, as you get your finances back in check, get into high-risk high-return investments such as Real Estate-Based Securities, venture capital, and currency trading.

Consult with a financial adviser on the options that go well with your current financial position and work your way to financial freedom.



Disclaimer: This content does not necessarily represent the views of IWB.


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