Many people become interested in the idea of investing in a mutual fund or investing in general and for good reason. A well managed mutual fund and a good investing strategy can be quite profitable and help one build a successful nest egg.
Of course many people considering mutual funds also have debt in the form of credit card debt, car loans, student loans, and mortgages. The question then is ‘should you pay off your credit and debt before investing or should you invest while paying down your debt?’
Most financial experts state that it is basically foolish to start funneling money into mutual funds or other investment vehicles while continuing to pay down high interest debt. The logic behind this statement is that very few, if any, mutual funds or investment strategies will reach a high enough return yield to cancel out interest being paid down on debt.
Basically if you have a credit card with a high balance and the interest rate is 12%, investing money into a mutual fund that will most likely never reach returns higher then half of that interest rate makes little financial sense.You do have to consider the credit debt you have and go from there.
Generally if you have a mortgage, most financial experts would say that as long as you can keep paying down your mortgage by making payments each month; putting aside some money to invest with is a great financial move. Those with student loans should work on paying those down but also are likely looking at mortgages and possible investing.
Both student loans and mortgages are often seen as ‘good’ debt; they are in themselves an investment. If you have a home that rises in value, you’ve invested in that property with the mortgage and might sell for a profit. If you’ve taken on student loan debt then you’ve invested in your education which should lead to higher earnings over your lifetime.
Again taking out ‘good’ debt for investment.If the average returns on a mutual fund are close to or above the interest rates you are paying on the mortgage or student loans, you could invest a little while continuing to pay down these debts.But if your debt is the form of credit card debt, payday loans, or car loans you’ll want to pay down that debt as quickly as possible. None of these kinds of debts are ‘good’ debt and are basically stealing away hard earned money that could be invested.
This isn’t to say that those with credit card and other ‘bad’ debt shouldn’t put some money aside; building an emergency fund is a great financial goal for everyone, but investing shouldn’t be considered until these debts are paid off or paid down. Invest in mutual funds if you have the money to do so and your debt’s interest rates are below the annual expected yield on the funds you chose to invest in. Otherwise you are just moving money that could be going towards your debts (and the high interest) into investments that may or may not perform well. Your taking a double risk here and spending more money on interest then you need to.
Pay off your credit card debts, car loans, and payday loans before even considering investing in a mutual fund. You’ll get out of debt quicker, pay less in interest in the long run, and eventually have some extra money to invest with.