Posted on: October 17, 2018 Posted by: James McQuiston Comments: 0

If you know and understand how to invest while being in debt you can make your limited savings grow substantially over time. A little knowledge, diligence, careful research and patience will ensure that you achieve this seemingly surprising and unachievable feat.

There are many people who are apprehensive about making an investment especially when they are already in debt, one or multiple. However big an obstacle it may seem, you can still overcome it and maintain good financial health.

There are different areas in which you can make such an investment even if you have a sizable amount of debt to cope up with such as a mortgage, credit card debt, line of credit, or student loan. All you have to do is balance your debts with your savings and invest judiciously.

Things to know beforehand

However, there are a few things to know before you contemplate on investing your hard earned money and little bit of savings.

Ideally speaking, if you have debt it will be difficult to make money as it will be much like bailing out a sinking ship in vain with a coffee cup. But, if you make an investment that will give you more than you pay as interest on your debts, you will be able to gain enough from your investments and get rid of your debts as well.

Factor in taxes, the cost of vat registration in uae,  and fees related to it so that you can make your investment more profitable than merely paying down your debt.

Research well for those investments that deliver high returns and most importantly, you must not forget that you are already in debt.

Different types of debts

The first and most important thing for you to know is to distinguish between the different kinds of debts that you may have incurred.

  • High interest debt – This is undoubtedly your credit card debt. Though the words ‘high interest’ is relative, but anything that is over and above ten percent is good enough to be considered as high interest debts. If you have any type of high interest debts or any kind of balance in your credit card then paying down or off these debts should be your top priority before you start to invest.
  • Low interest debt – These types of debts are usually your car loan, personal loan from a bank or a line of credit. The rates of interest in these types of loans are usually defined as prime plus or minus a definite percentage. This means there is still a considerable amount of performance pressure in making any investment when you have these types of debt. However, the rate of interest being low in these debts, it will be easier for you to design a portfolio for your investment that will pay you more than the interests you pay to your creditors.
  • Tax deductible debt – These debts can be termed as good debt, if there is any such thing at all like ‘good debt.’ These types of debts include mortgages, investing loans, student loans, business loans, and all types of other loans in which the interest paid is returned to you in the form of tax deductions. These debts once again carry low interest usually and therefore you can easily build your investment portfolio while paying the debts down.

It means that if you do not have any high interest debts then it is better to think about investing. As all your debts is tax deductible, you must focus on long-term mortgage payments and personal loans or other low-interest debts when you begin your investing quest. As for the high interest debts, consider consolidating these first and pay off but read the debt consolidation reviews before that.  

Growing your money

You must use compounding to grow your money. Ideally, focusing on debt elimination only will rob you of your time as well as money especially those loans that takes a long-term capital.

Looking deep into the long term, the time you lose in terms of compounding time of the investment is worth much more than the actual money you pay to your creditors in terms of the interest and principal amount.

You must give your money as much time as possible so that it is compounded. This is probably the most significant and best reason to start an investment portfolio even if you are carrying debts with you, though there are several other good reasons as well to invest being in debt.

Ideally, when you invest being in debt the amount you can and should invest is small but in the long run these small investments will pay you off more than those investments you are likely to make in your later life. The simple reason is that these small investments will have much more time to mature and compound resulting in the growth of your money.

Create a plan

You must create a strategic plan to invest rather than making a conventional portfolio comprising of several high as well as low risk investments.

Ideally, all your investments must be adjusted according to your age and level of risk tolerance. The primary idea and focus should be in making your loan payments in the place of these low-risk investments that will assure a fixed income.

The investment plan should be formulated in such a way that you can see the ‘returns, from it that will reduce your debt load and the interest payments. You should not focus on those two to eight percent returns on any specific bond or other similar investments.

As for the remaining part of your investment portfolio you must focus on higher-risk investments that will provide you with high returns such as stocks. If you have a very low risk tolerance, the majority of the investing money will be still used for making your loan payments. That means there will be a considerable percentage of money that will never make to the market to yield returns for you.

Therefore, make a proper plan and adjust your distributions according to your tolerance.

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