It can be seen as a risky move to invest your money on the market while still trying to pay off a debt—may it be a mortgage or a student loan. However, it is possible when you carefully do some number crunching and financial planning.
The question that looms in the minds of most is how do you know that it will be a good decision? Financial experts weighed in on what should people consider before going into investing while in debt.
WHEN IS IT OKAY TO INVEST?
Financial management experts agree that if the interest rate of your loan is high, you should make sure to pay it off first before anything else.
For Julie Virta, a senior financial advisor at Vanguard Personal Advisor Services, you can look into investing in the market if you’re paying a loan that has an interest rate of 5% or lower. She says that it is advisable if your expected earnings from your investment portfolio are more than the interest rate you are paying for your student loan.
Virta also notes that interested investors should look consider the market climate first before making investment decisions. Things are anticipated to get better in the next years after a stock market bull run from 2009 to 2018. Although you can’t accurately predict the future, researching returns from recent years should be a priority before making a decision.
Financial experts from Ellevest advise clients to settle debts that have rates above 7%, according to the company’s CEO, Sallie Krawcheck. She also said that the annual stock market returns since the 1920s have been at 9.5% on average. Some years have been less satisfactory, while others fared better. For Krawcheck, a diverse investment portfolio is expected to have annual returns of 6%.
Betterment’s Vice President of Financial Advice, Alex Benke, recommends setting up an emergency fund and settling high-interest debts before going into investing. Maintaining payments for a student loan debt before you invest is okay as long as its interest is at 5% or less.
According to Benke, this rule only applies to general investments in a taxable account. So, making contributions to employer-matched retirement plans like the 401(k) is fine even if your loan has an above 5% interest rate.