Investing and debt are both important aspects of finances. But if you find yourself under a mountain of debt you may feel overwhelmed and that it is necessary for you to put all extra money into paying it off. In this article, we will go over 3 steps you can take to help balance investing and debt.
Categorize Your Debt
There are two main types of debt you can incur-useful and costly. Useful debt is long-term debt that can help you better your personal standing. This type of debt typically has lower interest rates and may have tax advantages. Some examples of useful debt are student loans, mortgages, or business loans.
Costly debt is high-interest debt that you can incur to purchase items that will quickly decrease in value. Examples of costly debt include credit cards, payday loans, and vehicle loans.
Analyze Your Finances and Create a Budget
Once you have categorized your debt it is important that you analyze your finances and create a budget. When you are doing this, you should implement the following key factors:
- Maintain minimum payments on your useful debt.
- Make paying off costly deb the priority, starting with the highest interest rates.
- Look for ways to reduce your spending.
- Try and set up a small emergency fund.
- Create a budget and stick to it.
Create and Investing Plan
When creating an investment plan keep in mind that saving and investing are two different financial functions. Saving is simply setting aside money for future use. Investing is setting aside money in a way that it will grow past the original amount invested. This is done with the intent that the increase will help you to reach specific future financial goals, like retirement.
When deciding how much to invest, remember that even a small amount invested on a regular basis can make a big difference. This is due to the power of compounding interest. If you find yourself with a tight budget, try and at least contribute to your company’s retirement plan. This has tax advantages and the potential to greatly increase your contributions with employee matching.
Investing with Debt is Possible
Investing and debt can work successfully together. It just takes a little preplanning and adjusting. But creating good habits now will help you to pay off your debt and secure a nest egg for the future.
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