In the United States, almost all of us take on debt for our daily expenses. Examples include house mortgages, student loans, car loans, and credit card debt. Owing money is one financial mechanism for daily life, but most of us do not want to just survive. We want to thrive. To do this, consumers can build personal wealth and develop finances through investments. How can investing occur while in debt? Read on to find out more.

First, why invest?

The volatility of the economy in the 21st century makes relying on a salary only a tentative way of ensuring of a financially secure future. Investment routes allow for an alternative way to gain income without being limited by the time or energy of pure labor and wages. Some advantages of investing include:

• Having funds to tap into for unexpected life events, such as sudden illnesses.
• Securing funds in anticipation of long-term goals, such as retirement.
• Gaining wealth for personal autonomy, allowing for independence from completely relying on an employer.
• Controlling a pool of money during times of inflation. As the cost of goods rise, the expectation is that salaries will increase proportionally, but some employers are even more hesitant to increase wages during uncertain economic times. Investment allows for an alternative route to counteract the delay of employers.

Can consumers invest while in debt?

No consumer should feel limited from the ability to invest. One of the greatest facets about the United States is that members of any class can increase their financial stature. Investing is one way to combat debt and can be a mechanism for increasing personal wealth. While anyone can invest, no investment is guaranteed. Almost every investment will have a certain amount of risk. While consumers who are in debt still should certainly hear out and seek investment opportunities, they should also be acutely aware of their finances and the level of risk they are able to tolerate, as every dollar spent in investment that does not have a return is a dollar missed that could have gone towards lowering personal debt.

Risk factors of investing while in debt

Investing while in debt takes courage. The most considerable risk faced is how to act when market volatility does not lead to financial gains. For consumers in debt, significant financial losses could lead to defaulting on loans, which can lead to penalties and bad consumer credit score. Moreover, investments can take a serious psychological and emotional toll when trying to determine whether enough cash on hand is available for personal responsibilities. As mentioned before, an acute awareness of one’s financial situation and risk tolerance is vital. Knowing where the limits lie and making sure there is enough saved for a “rainy day” are all key components to financial responsibility.

Rules of thumb in investing while in debt

There are some other tips that might help to keep in mind when investing while in debt, such as:

• Investing in securities that have a proven track record of higher returns than debt interest can help to keep risk low. For example, if a stock market index has annual returns of 10%, and a consumer has a mortgage with an annual interest of 5%, then the consumer may benefit from placing the money in investments (presuming that the consumer has enough cash on hand to pay off the regular mortgage payments).
• In the same scenario, if a credit card has an annual percentage rate (APR) of higher than 10% (such as the 15-20% range commonly seen for shopping store cards), a consumer might consider trying to pay down the debt before investing since the gains from the investment are not enough to cover the payments on the card.
• If a lender imposes a penalty for paying off a debt late that is higher than the interest rate, then investing will carry a more significant risk since investments take time to secure returns.
• As mentioned before, an emergency fund is crucial to determine the level of risk tolerance available. Low-risk investments are a great way to start investing, such as Money Market Funds (MMF) or mortgage bonds.

Ways to invest with a small budget

Here are some ways to invest when on a small budget:

• Sign up for the company retirement plan – Investing in a retirement plan is a great way to set aside money for retirement. Most companies will offer a matching program, essentially allowing for a consumer to get free money without additional work.
• Open an IRA – IRAs allow for gradual investment for the goal of retirement. IRAs can be complicated, but there are specific ones that are non-taxable each year. Talk to an advisor before opening up an IRA or see the links below for more information.
• Invest in Exchange-traded funds (ETFs) – ETFs are a collection of stocks like Apple, Amazon, Walmart, etc., and are traded and sold like individual stocks. Investing in this "basket of stocks" allows for consumers to invest in a certain industry or sector will still being able to have a diversified portfolio. There are commission-free ETFs that are great alternatives when capital on hand is low.
• Online investment apps/platforms – Certain online trading apps allow for consumers to trade without having pay transaction fees. These fees may only be between $1-5 per trade, but they can substantially add up as multiple transactions occur.

Take Your Time and Do as Much Research as You Need

Investments are a risky proposition inherently and can present even more risk to consumers who have debt obligations. Feel free to take as much time as you need and do your due diligence to determine where your finances sit, what your risk tolerance is, and what investments make sense for your profile. For more information, see the references below for some great starting points for more education.