What Happens If You Invest Consistently but Ignore Debt? A Recipe for Ruin
Personal finance is not a one-size-fits-all undertaking because so many factors come into play, from your income and family size to your location and lifestyle preferences.
But as a general rule, the best financial plan includes a combination of managing expenses and growing wealth. Ideally, you’ll achieve a balance between the two.
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But what happens if you’re good at investing consistently but often ignore your debt? Here’s a look at what can go wrong.
The Risk of Ignoring Debt
An important thing to keep in mind is that ignoring debt for too long can have catastrophic consequences — especially if it’s high-interest debt. This is the case whether you invest consistently or not.
You can run your balance up in a hurry if you charge a lot of purchases in a short period of time. In addition to the interest you pay, you’ll get hit with late fees if you ignore the debt to the point where you don’t pay your bills on time.
From there, things can snowball quickly. Here’s what can go wrong, according to National Debt Relief.
Damaged credit: A multitude of factors affect your credit, but high balances and carrying a balance month-to-month will ding your score. Worse for you personally: You'll be spending money unnecessarily on fees and high interest, making it even harder to pay off. This spiral will drive up the balance and hurt your score even more, making it harder to secure credit in the future when you need to get a car, home or other loan.
You could face collections: Once debt goes unpaid long-term, your creditors will turn to a collection agency. This, too, damages credit, and if you owe money on a physical object, such as a car or house, the lender could seize your property.
Debt lawsuits: The next step is legal action, when creditors will bring suit against you. The consequences of this will empower them to bring an even heavier burden into your finances.
Wage garnishment: A successful lawsuit often results in a court judgment to garnish your paycheck, take money out of your bank account or put a lien on your property. At this point, money is escaping your hands and the cost is often far more than the debt's principle.
Impact on Investment Strategy
Investing consistently while you ignore debt might sound like a decent tradeoff, but that’s almost never the case.
It helps to think of debt as its own kind of investment. Actual investments almost always entail some amount of risk, usually inverse to their payoff, but it is possible to lose money. Paying down debt is a guaranteed payoff, albeit one that won't leave you with more money than you had — just less money than you'd owed.
That actual guaranteed rate of return is powerful. You're unlikely to ever see an investment with a guaranteed 22% return and no risk of loss, but paying off a credit card early amounts to the same thing.
There are the additional benefits of improving your score through reduced credit use, as Towerpoint Wealth noted in a blog. A report from Experian offered a similar view, suggesting that paying off high-interest debt before putting more money into investments is the smarter move.
At the very least, you should find out how much the debt is costing you versus how much the investments are bringing in. Towerpoint recommends comparing your debt’s interest rate to your expected investment returns.
For example, if you’re paying 20% on a credit card and expect a 10% return from your investments, then the smart move is to pay down the debt first and moderate your investments. Otherwise, you’re losing money.
What You Should Do
The best strategy is to pay off your debt while also investing consistently. As PNC Bank pointed out, investing provides an opportunity to earn money over the long term, while paying off debt can make future cash available as needed, which is both financially more stable and psychologically less worrisome.
If you’re torn over what to prioritize, Experian offers these tips:
When You Should Pay Off Debt | When You Should Invest | |
Interest rate | The debt has a high interest rate (8% or higher) | The debt has a low interest rate (typically 7% or below) |
Type of debt | You have high-interest credit cards, payday loans or other costly debt | You have a low-interest mortgage, federal student loans or other manageable debt |
Cash flow | You're struggling to make minimum payments or living paycheck to paycheck | You have extra money after covering expenses and debt payments |
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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