Should you pay off all your debt, before you begin to invest in stocks?
This questions pops up often, and the answer depends on your situation.
If you have a lot of debt, and if it’s very expensive debt like credit card debt, then the answer is no.
Pay your debt before you begin to invest.
But if you debt is of the healthy kind with a low interest rate and if it used for building or purchasing some kind of asset – like a mortgage or a student loan- then the answer is yes. Begin your adventure into stock investing even though you are still paying of the mortgage or student loan.
If we all waited with investing until we had paid our student debt and mortgage, then we would miss out on the stock market almost until we reached retirement age.
Here are three simple reasons for investing before your debt is completely gone:
Reason no. 1: Your return will be bigger than the interest
If you can make more money investing than you actually pay in interest on you debt, then you make a profit. Go for it. Invest.
But in the opposite case, you should stay away from investing. In other words, if you are not sure that you can make more money on the investment than you pay in interest on your debt, then stay away.
Lets be specific. If you pay 3 percent interest, and if you feel confident that you can make an 8 percent return on your investments then go ahead.
But lets say that you pay 15 percent in interest and you think you can only make 4 percent in return on your stocks – then you are losing money, and you should not invest before the debt is paid off.
How high will the return on your investments be?
That depends on how good you are at picking stocks.
Stocks gives you an average of 7-8 percent in return if you invest in indexes (the stock index S&P 500 has given a return of almost 8 percent since 1957).
Reason no. 2: You get valuable stock market experience
Investing is a skill that takes time to learn.
It makes sense to get into the markedet at an early age. You take advantage of compound interest which means that your return will make a return and your money will grow exponentially. So will your experience and your ability to make a good return on your investments.
You can learn some stuff from investment books, podcasts and Youtube-videos, but you really learn the most from practicing it and getting some real world experience in investing. A combination of learning from books and courses and getting practical experience is the best combination.
If you wait until you have paid your whole mortgage down, then you loose a lot of valuable time learning.
The great news is that you will learn regardless of how much money you invest, so you can begin with a little money until you feel more confident.
Reason no. 3: It is motivating to invest
It is fun and fascinating to see your money grow. That is very motivating when you are trying to save money, pay off debt and manage your finances in general.
You will want to have more money, make more money and save more money once you get started on your investing journey.
I would go so far as to say that you will regret it later, if you don’t get started now. When you discover what your money could have become, you are going to wish that you had known this when you were younger.
If you want to learn how to invest like the best, I can read my ebook here.
You can begin with this check list with 12 questions you should investigate before you put your money in a company. You can download it here.