Should you be investing if you have credit card debt?
If you have a little bit of extra cash on hand you might be wondering what is the best thing to do with that money. You might not know why it may be better to pay off debt before investing, especially high interest debt. Right now we find ourselves in a particularly strange situation with the uncertainty that lies ahead with the current pandemic.
Do you have an emergency fund?
It is always a good idea to maintain a certain amount in an emergency fund. Of course everyone’s situation is different but a common example many follow is the $1,000 emergency fund. I agree that leaving money sitting in a traditional savings account seems like a poor choice. Personally I keep my emergency funds in my worthy account (currently making about 30 cents a day in interest). If you are going to maintain an emergency fund then I recommend finding the highest rate possible with zero fees.
Get rid of those high interest debts
Beyond the emergency fund, I believe extra cash should be used to pay off any high interest debts. Credit card debt comes to mind. The average credit card interest rate in the US is between 15% and 19%. It often times does not feel very rewarding to drop a few thousand dollars on a credit card debt. This is especially true considering how long it probably took you to accumulate those funds and the fact that the card is probably not even paid off.
Average is not cool
The average American has around $6,000 of credit card debt. Most of us have very little beyond a nice television to show for all that debt. There are many different types of debt but in my opinion I believe credit card debt is some of the worst debt to have.
It is very likely that it is more beneficial to pay off the debt than it is to invest the money. As difficult as it may be to use that money saved to pay down the debt it is very beneficial for two reasons. The first is that there are very few investments available right now that will earn you a return in the high teens. In essence you are getting a return equal to your interest rate by paying that debt off. The second benefit is by paying these debts off, you increase your own level of security and reduce your level of stress.
The bottom line
Most of us either have some credit card debt or have struggled with it in the past. You have to take stock of your own situation, eliminating credit card debt will not do much good if you turn around and get back into debt shortly after paying it off. This can be a vicious cycle that erodes our ability to invest and become wealthy. I believe it is best to pay off debt before investing. If you do not have enough discipline to pay off high interest debts and keep them paid off, why do you think you can be a disciplined investor? It is time to take action, grow up, and start the journey to financial freedom.