One question I get asked all the time is about investing while still clearing debt. Is it a good idea and what are the implications if you do so? I think it’s such an important question that I’m going to tackle it on its own.
A Debt Scenario
Let’s say you have some debt you’re paying down and it costs you £250 per month. But you’ve actually identified £500 per month that you can pay yourself first with. Should you double your debt repayments and get rid of it much faster – paying £500 a month against the debt instead of just £250? Or should you stick with the £250 towards the debt, and invest the other £250 per month?
It depends on how you approach this. It might make mathematical sense to split the payment. The thinking is that the money invested is growing, maybe even faster than the interest on the debt payment, plus it feels good to have some money building alongside while clearing the debt.
I don’t buy that. I like to be fairly compartmentalised with my finances, and I recommend that you are too, because you’ll benefit from that. I get the temptation to begin investing, while still paying down debt, but I think you’ll benefit from waiting, and piling as much money as you can to clear any bad debt first. I’m not talking about mortgages, and I’m not talking about student loans. I’m talking about credit cards, overdrafts, personal loans, that sort of stuff, which I identify as ‘bad debt’.
I would pay down the debt in double-quick time in that scenario. I would pay the full £500 that I have identified as being available to pay myself first with against the debt. And then, when it’s clear, not only will you get the amazing feeling of being debt-free, you’ll also see your investment pot grow much faster, because of course, you’ll have more money to throw at it.
Don’t worry about missing a market movement or anything like that. Market timing isn’t going to make or break you in this regard. I would err towards clearing debt, and then see your investments grow much more quickly.
Also, don’t pay off your debt and then immediately start investing for the longer-term stuff. You need to have an emergency fund in place to prevent the need to go into debt again when the next unexpected bill comes through. Having that buffer between you and the world, three to six months’ worth of outgoings ideally, will really help you out and stop you having to divert money away from your investments just to pay off an unexpected bill.
When you do begin investing, it’s important not to get too fancy too quickly, if you’re a novice. You may be tempted by all kinds of interesting-sounding options and things to put your money in – maybe your mate down the pub is telling you about the latest thing that he’s bought.
But he might be further along than you. Investing, in my view, is best kept simple. Don’t take one step forward and two steps back. Don’t divert or distribute your attention to more than one place. Pile money against debt first, then really pile money into investments. And don’t get involved in things that are too fancy at the outset.