Investing is a powerful tool for growing your wealth. If done right, you can make some serious ROI (return on investment). On the other hand, leaving money in savings yields minimal interest and barely keeps pace with inflation.
However, diving into investments while carrying credit card debt isn’t always the wisest choice. Why? The answer lies in the numbers: the interest rate on most credit cards is significantly higher than the average return on investment.
This means that the cost of your debt can outweigh the benefits of your investment. Therefore, paying off your debt before proceeding with investment opportunities is usually wise.
Learn whether you should invest if you have debt below.
Understanding the Financial Impact
Let’s look at some figures to better understand this concept. Many credit cards have interest rates starting from 17%. This is much higher than the typical annual return you might expect from a well-diversified investment portfolio, which ranges from 7% to 10% per year.
Thus, investing your money while paying high-interest credit card debt is akin to trying to fill a bucket with water while it’s leaking from the bottom. For this reason, we do not recommend investing if you have outstanding debt.
For example, if you invest $10,000 expecting a 10% return, you’d make $1,000 in a year. However, if you have $10,000 in credit card debt at a 17% interest rate, you’d incur $1,700 in interest charges over the same period.
This results in a net loss of $700. Hence, unless you have substantial disposable income, it is financially prudent to prioritise paying off your credit card debt before venturing into investments.
The Path to Financial Stability
You can maximise your earnings through investments once your credit card debt is cleared. This practice is foundational for building wealth.
By combining disciplined savings with strategic investments, you can reach a point where your money starts to work for you, generating passive income and financial security.
Saving for Retirement
Does saving for retirement make an exception to this rule? Absolutely. It is highly advisable to continue contributing to your retirement account, even if you have credit card debt.
This is particularly true if your employer offers a matching contribution to your superannuation. After eliminating your high-interest debt, investing a portion of your income into retirement savings is a good idea.
Starting Your Investment Journey
When you’re ready to invest, it’s crucial to have a well-thought-out plan. If you’re new to investing, seeking advice from a financial planner can be invaluable. They can help you set realistic financial goals and create a strategy tailored to your needs.
Managed funds are an excellent starting point for beginners. These funds pool money from many investors to purchase a diversified portfolio of stocks, bonds, EFT’s or other securities. This diversification helps mitigate risk. As you become more knowledgeable and comfortable investing, you can explore other avenues, such as direct stock purchases or real estate investments.
Remember, diversification is key. Avoid putting all your money into a single investment, as this increases risk. Real estate can also be a lucrative investment, but purchasing property with cash is generally advisable to avoid additional debt.
Final Thoughts
Investing is a decision that requires careful thought and planning. It’s generally unwise to invest when you’re still burdened with high-interest debt. Investing becomes a smart move to grow wealth once you achieve financial stability by paying off your credit card debt.
At Australian Lending Centre, we provide financial solutions to help with debt. Whether you want to start investing or consolidate your credit card debt, our consultants are here to assist you.
Apply with us today and receive support for your financial journey.
