Should You Invest If You Have Debt?


Should you invest if you have debt? The answer might surprise you. Many people are eager to get started in the stock market, but other financial obligations are holding them back.

You can (and should) start investing even if you have debt

Should you invest if you have debt?

Paying off debt and building wealth doesn’t have to be an either-or decision. You can do both at the same time. You will likely come out further ahead with this strategy rather than focusing on one above the other.

There are circumstances in which investing while you have debt is not a good idea. Namely, when your debt balance is very large or at a high-interest rate. Likewise, the savings side of your budget determines if you can afford to invest at all. Here are the questions you should ask when you ask, should you invest when you have debt?

Is your debt balance greater than $25,000?

Even at low-interest rates, large debt balances are expensive. If your debt balance rivals your annual salary, you want to get it below the threshold of $25,000 before you start dabbling in the stock market.

It might seem crazy to pay only 5% on your student loans when the stock market has historically returned 10%, but remember, those interest rates are working in opposite directions. One is taking away from your wealth and the other is adding to it. I don’t believe in getting completely to debt-free before you start investing. However, you should reduce your balance to something manageable before you jump in.

Is any of your debt high-interest debt, like credit cards?

Most credit cards charge 20% interest, so if you’re carrying a balance, it’s costing you far more than you can hope to earn in the stock market. Even if your total debt balance is under $25,000, if you’re lugging around a balance owing at a double-digit interest rate, you’re better off paying it off before you direct your money elsewhere.

Not sure about your total debts? You can see everything you owe by requesting your free credit report from Borrowell. You can also get your credit score, which can help you lower the interest rate on your balances owing.

Even if it means you have to delay your entry into the stock market by a few months or years, work hard to pay off any debt balances with interest rates greater than 10% before you invest.

Do you already have an emergency fund of at least $3,000?

I’ve never found the advice of having 3 to 6 months of essential expenses saved for emergencies reasonable, and I’ve weathered the unexpected financial catastrophes like divorce and an unplanned pregnancy. That’s not to say you shouldn’t save up that amount; it’s merely to encourage you not to put every other financial goal on the backburner while you do so. However, it’s never ok to have no emergency fund. I generally find for most young people in their 20’s and 30’s without kids or a mortgage, a small emergency fund of $3,000 to $5,000 is more than enough. But under no circumstances should you have less than that.

RELATED: The $20 Emergency Fund

It’s important to have an established emergency fund before you start investing because the money you put in the stock market is for the long-term, and should not be withdrawn if you go over budget one month or get slapped with an unexpected bill. You want to have a healthy-sized emergency fund that ensures you won’t need to dip into your investments if you need extra cash.

Do you have $1,000 to open a brokerage account?

To invest in the stock market, you’ll need to open a brokerage account. This is different than a bank account, and it’s what you need to make trades on the stock market. Most brokerages require a minimum of $1,000 to open an account, but some require as high as $5,000. You need to save up the minimum amount in order to open an account and begin your portfolio. If you don’t have $1,000 to spare, you’re not ready to invest. Focus on saving this amount before you jump into the stock market!

I use Questrade to manage my portfolio. It’s my favorite online brokerage because it offers low-free trades and it’s free to buy ETFs. With most major bank brokerages charging anywhere from $10 to $30 per trade, Questrade is a steal. The less you pay in trading commissions, the faster your portfolio grows.

Can you afford to contribute at least $100 per month to your investments?

The secret to building wealth through investing is consistently contributing to your accounts and letting them grow. Ideally, you should be contributing at least 10% of your net income towards your long-term investments, but if this is unaffordable to you right now, you should start with at least $100 per month. This won’t make you rich, but it is enough to get you into the habit of investing and start to grow your portfolio. If you cannot find an extra $100 in your monthly budget to put into the stock market, you’re not ready to start investing and you need to focus on increasing your income, reducing your debts, or cutting your expenses.

A general budget starting point is to be putting 15% of your net income towards debt repayment and 10% towards long-term savings and investments. In other words, 25% of your net income should be going towards increasing your net worth.

New Investor Checklist:

  • No high-interest debt
  • Total debt balance is less than $25,000
  • Have $3,000 to $5,000 or more in emergency savings
  • Have $1,000 saved to open a brokerage account
  • Have at least $100 in your monthly budget to contribute to your investments

Happy investing!

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10 Comments. Leave new

  • This is an AWESOME checklist. I’ve been looking for something specific like this. I love the idea of waiting until you reach a certain debt threshold before you start investing seriously. In many ways, the return you get from paying off debt can be greater than the return with investing.

  • Liam @ Tips For Real Estate
    August 23, 2017 5:11 am

    I would be very careful with investing, when already in debt. But it makes sense that, if you have a bit of funds available that won’t put you into even a bigger mess, should you fail with investing, to try this. It’s important to be prepared to lose all this money (or at least not get the returns planned), since investing is not always certain to work.

  • Thanks for your perspective, Bridget.

    I have to say I had tremendous success to the approach where you pay off all your debt as quickly as possible, then build your emergency fund, and then begin investing. Sort of like the Dave Ramsey plan. I think debt is too seductive in our culture and people sometimes think they can borrow their way to wealth. I’m in a professional field and I’ve heard some of my colleagues say that they want to use the remaining space they have on their professional LOCs (they remain open for some time after you graduate) to invest in the stock market because interest rates are so low.

    But I agree that it’s important to start investing as soon as possible to take advantage of the power of compounding and to learn how to pay yourself first.

    I hope you and the baby are doing well. Thanks for always producing so much great content.

    • It totally depends on the person, too! Some people find debt way more psychologically painful than others (and unfortunately some people don’t find debt painful at all!!)

      Baby and I are doing great =) I’m slowly adjusting to motherhood… she’s strapped to my chest as I type this reply haha

  • Great checklist! Greetings from another Canuck.

  • I like this guide you made, especially the New Investor Checklist. It gives people that much needed positive outlook – there’s still hope for one to be an investor while paying off debt.

  • Absolutely on point. At the end of the day, it’s all about the long-term implications of your debt and the potential returns you could make in the stock market. Unfortunately, your debt payment is a sure thing and generating returns over and above that in the stock market is far from that. However, it’s important to let that investment snowball build since time is your friend. Thanks for sharing!


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