Can You Invest While You're in Debt?

You know that you should be saving — for retirement, for a house or new car, for the proverbial rainy day — but you also get monthly, by-mail panic attacks reminding you of your debt. Maybe you have a car loan or student loans to pay down. Maybe you made some questionable financial choices and dug yourself deep into a pit of credit card debt. Whatever you owe, those negative balances and strongly-worded reminder letters are stressful AF.

But here's the million dollar (kind of literally) question: Can you invest while you're in debt?

The short answer is: Not really.

The longer answer is: It's complicated and the balancing act that it requires will make you feel like a legit circus performer.

Invest in your future no matter what debts you owe

Let's start by pointing out that investing in your future is a totally different kind of investing than what we'll discuss later. When it comes to investing toward retirement, you absolutely must start now, no matter what your financial situation looks like otherwise. Even if it means paying down a debt more slowly, find money in your budget to put into your 401K, IRA, or other retirement investments. Do it now because the magic of compound interest will make that investment worth so, so much more than putting that money towards paying off your Visa a little more quickly.

Think long and hard about investing in the stock market if you still have debts

Outside of your retirement accounts, you'll need to think long and hard about playing the stock market if you're still in debt. It all comes down to the kind of debt that you're dealing with and the kind of investment opportunity that arises. As Money Under 30 points out, "If you have a $2,500 loan at a 6 percent APR but could invest somewhere else and get a 8 percent rate of return — it would make more sense to invest that money instead of paying off the loan."

If your debts are mostly in the form of low-interest student loans or "good debt," like a mortgage payment, you don't necessarily need to funnel every extra cent into paying them off and, if a smart, safe (but remember, "safe" is relative — no stock is ever totally safe) investment comes along, it might actually make sense to put some money into it. In this scenario, it's all a numbers game. If the gains you're likely to make on the investment outweigh the interest on the debts you're carrying, investing is a potentially-responsible option.

But if you have this kind of debt, now isn't the time for extra investments

While "good debt" might seem like an oxymoron, it does exist (to an extent) and if that's the kind of debt that you're carrying, by all means, keep an eye out for sound investment opportunities. But, if the kind of debt you're carrying is more nefarious, then your best plan of attack is to pay it down now. Seriously: Cut out your extras, stop buying $3 coffees, and just get that debt paid off.

We're talking, of course, about high-interest, destroy-your-credit-score-and-your-life credit card debt. Not only does credit card debt carry much high interest rates (meaning that any investment would have to have a much higher return on investment in order to be attractive), but, as Forbes points out, it also represents a larger emotional burden. Even if, for example, you found an investment opportunity likely to yield large enough returns to justify hanging onto your debt, it's also worth considering how that debt makes you feel. And for most people, that debt makes them feel stressed, anxious, and all-around terrible.

So should you invest if you're still in debt? Here's a quick breakdown:

  • If you're investing toward retirement then yes, absolutely. Always.
  • If the debt you're carrying is low-interest or "good debt" (think low-interest school loans or a mortgage) then maybe. If the return on your investment is likely to be higher than the interest you're paying, then it might be the smart move.
  • If the debt you're carrying is monstrous, high-interest credit card debt, then no, please don't. Don't invest in your friend's cool startup idea. Don't gamble on a hot new stock tip. Just pay off your debts and enjoy some emotional relief before you jump into the investing game.