How To Think About Investing If You Have Debt

If you’re trying to achieve your financial goals, you may be wondering: How do I think about investing if I have debt?

Being totally debt-free is hard—which is why consumer debt is more than $16 trillion dollars in the United States, averaging around $96,000 per consumer, according to Bankrate (1). But being smart about your debt and investing wisely both impact your long-term financial future.

There are ways to prioritize both paying down debt and investing, but it depends what kind of debt you have and how much you’re carrying. Here’s how to think it through.

You don’t have to come from money to invest. According to a Magnifi study, 49% of investors realize they can get started in the market for just $100 (2). This is thanks largely to offerings like fractional shares, which are available on Magnifi for individual stocks as well as many exchange-traded funds (ETFs) (3).

Many high-net-worth individuals (or HNWIs, for short) recognize that working hard and saving alone don’t cut it. Most savings accounts offer super-low interest rates (the average annual percentage yield (APY) of a savings account is just 0.19%) (4). Compare that to the S&P 500 (5), which has delivered an average annual return of 7.58% (or 10.51% with dividends reinvested) since 1971 (6).

With this in mind, it’s clear investing has its pros. At the same time, high debt balances or debt with high interest rates can eat away at those earnings. That’s why it’s important to take stock of your debt before you decide how you’ll allocate your money.

Categorize your debt to find out where you stand

All debt is not created equal. That’s why it’s important to review your debt based on interest (high or low interest) and balance (high or low balance).

 Is it all in one place (like a student loan) or scattered about (across credit cards, student loans, personal loans, auto loans, and more)?

Group your debt together by interest rate.

 Generally, experts suggest using a threshold of 7–10%, with below that mark being low interest and above that mark being high interest. This falls in line with the annualized stock market returns mentioned above, plus some wiggle room for market volatility. Basically, you’re seeing what debt you have that might erase any returns you earn from investing.

If your debt balance is high, even low interest rates can add up. You can determine if you have a high overall debt balance by looking at your debt-to-income (DTI) ratio (7).

DTI ratio = Overall monthly debt payments / Gross monthly income

A DTI ratio of 50% or more suggests you have a high debt balance for your income, regardless of the interest rates on that debt. The sooner you lower that balance, the likelier you are to repay it.

That doesn’t mean you can’t invest while lowering your debt balance, but you should do so strategically (more on that below!).

Pay off high-interest debt sooner rather than later

Fact: High-interest debt can pile up fast, even if the initial balance doesn’t seem overwhelming.

If you have credit card debt, you know this firsthand. The average credit card annual percentage rate (APR) was 16.27% in the U.S. for Q3 2022 (8).

After categorizing your debt by high or low interest rate, if you find that you have some high interest debt you can knock out, do it. Then, you can put more into investing in stocks, funds, and other securities for your future.

Low-interest debt can wait, but don’t ignore it

If you invest wisely, your investing returns may outpace any low interest rate charges added to your loan or credit card balances. In that case, you can feel confident you’re not losing money by making payments as normal on your low-interest debt.

That doesn’t mean you should ignore your low-interest debt in its entirety. It simply means you have some extra margin (aka any money left over after paying your expenses) to contribute to investing for retirement or other long- or short-term goals.

Whatever you do invest, having a smart investing plan helps. In the olden times, you had to tap professionals to help you understand the markets, but that’s no longer the case. AI assistants like Magnifi Personal can answer any questions you may have about diversifying your portfolio, finding funds and stocks that hit certain performance targets, and more—even giving recommendations for investments you can add to your portfolio.

Assigning your money to prioritize investments 

It’s important to create a space for your money to go—so it doesn’t simply go out the window.

If you are repaying debt but also want to invest, add so-called buckets labeled 

These buckets can be different sizes depending on the scope of your debt. You can also have multiple buckets for investing if you want to invest for different goals (like pre-retirement and retirement, for example).

: If you have more debt than you’re comfortable with, focus on investments that don’t add 

 debt. For example, this means avoiding physical real estate for the time being, but you can still take advantage of real estate investment trusts, or REITs (8). If this strikes your fancy, try searching 

 on Magnifi for some tips, or an entirely different query based on your interests.

Bottom line: Paying off debt and investing both require a strategy

Improving your long term financial health isn’t a one-lane road. Paying off debt and investing are both important—but if you have debt, it’s important to find a balance between the two.

Create an investing strategy that allows you to pay off debt while still reaping returns.

Above all, be strategic about how you’re allocating your money, shedding high debt balances and high-interest-rate debt where possible so you can invest in a way that serves your future self best.

Woodward, Emma, "Average American debt 2021,"Bankrate, 22 November 2022, https://www.bankrate.com/personal-finance/debt/average-american-debt/

"5 Year-End Tips to Make the Most of Your Investments," Magnifi, https://invest.magnifi.com/investing2022/

Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Goldberg, Matthew, "What is the average interest rate for savings accounts?" Bankrate, 09 December 2022, https://www.bankrate.com/banking/savings/average-savings-interest-rates/

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

Sullivan, Bob, "Average Stock Market Return," Forbes, 17 August 2022, https://www.forbes.com/advisor/investing/average-stock-market-return/

"What is a debt-to-income ratio?," Consumer Financial Protection Bureau, 8 June 2022, https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/

Schultz, Matt, "Average Credit Card Interest Rate in America Today," LendingTree, 21 November 2022, https://www.lendingtree.com/credit-cards/average-credit-card-interest-rate-in-america/

A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.

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