Here’s How To Do Debt And Still Invest

Intent on making 2018 your Best Year Ever? We can help with that, thanks to our Coach of the Month series. This January, Ellevest CEO Sallie Krawcheck will upgrade your financial health, teaching you how to make more money — and make the most of the money you have. This week, whether you’re looking into investing for the first time or just hoping to glean new insights, Krawcheck has the answers for you.

Debt is a fact of life — without it, many of us would never own homes, start businesses, or even buy a car. And debt is not a scarlet letter! But the truth is, many women let debt stall their entry into investing. So it’s important to know the facts about debt and investing and how they do (and don’t) relate to each other. You…um….owe it to yourself.

First of all, do I really need to worry about investing?

Want to have the potential to earn hundreds of thousands of dollars more over the course of your life? I thought so.

That’s how much the “gender investing gap” can cost us: women do not invest as much as men do. We start later, we earn less (yes, the gender wage gap already puts us behind), and then, on top of it, we “save” more, parking a whopping 71 percent of our money in cash, which, if held in a savings account account at a bank, has a return of almost zero. This is in contrast to the stock market, which has returned 9.5 percent on average annually between 1928-2016. These may not feel like big differences, but over the course of your life, believe me, they are.

And remember: we women live longer than men, our salaries generally peak earlier than men’s, and we tend to have nonlinear careers—all reasons we should be work to invest more than men do, in order to ensure we have our F.U. money in place by mid-career or earlier.

Okay, I got it: Invest. But don’t I need to pay off all my debt first before I put money into investing?

Good thinking. But not all of it; just the “bad” debt.

Not all debt is bad: The types of debt that have lower interest rates and that can help you build a solid foundation for your life and your earnings power — such as student loan debt — are typically “good debt.” Over the last decade, federal student loan interest rates for undergraduates have ranged from 3.4 percent to 6.8 percent, depending on the type of loan and when it was taken out. So the rates tend to be relatively low, and you may be able to deduct student loan interest payments of up to $2,500 from your taxes, depending on your income level; that further reduces the annual cost of the loan.

Mortgages can also be “good debt”: the interest rate can be relatively low (around 4 percent, and tax-deductible in many states), and your home is a major asset that has the potential to increase in value over time. Oh, and you live there!

That said, too much debt, no matter whether it’s “good” or “bad,” is always bad. The rule of thumb at Ellevest for is to keep debt payments to 20 percent or less of take-home pay; and 40 percent is a danger zone.

Okay, so I can hold on to “good” debt and invest, but what about the “bad” debt?

Bad debt is high interest rate debt. Think credit card debt: Aside from the fact that interest rates on credit cards today range from 12.0 percent to 22.6 percent — which is nuts — there’s no tax break on that interest. So, if you buy something for $1,000 on a credit card in the middle of that range of interest, a year later that item will have cost you more than $1,270 to pay it off. It’s like you bought it on “un-sale.”

And it can add up fast. I recently met with one woman who, we calculated, was working several weeks a year for the credit card companies — and not even to pay off her credit card debt, but for the interest that she owed them. It was heart-breaking and back-breaking.

It may sound tough, but the best rule for using credit cards: If you need to rack up credit card debt to buy something, don’t buy it. Seriously. Just don’t. And if you have credit card debt, pay it off as soon as you possibly can. Perhaps look into transferring your outstanding balance onto a zero-interest-rate credit card and use the money you save to pay off more of your balance.

It’s just so easy to run up credit card debt. But it can get in the way of achieving your dreams.

But wait — I paid off my credit cards and now I have a little money. Should I pay off some of my good debt?

Well, it depends.

Now the question becomes, “What else could you be doing with that money?” Or, let me put it a little differently: What could that money be doing for you? The stock market has its ups and downs, but remember from above that, over time, it has provided a return of about 9.5 percent on average annually — for more than 90 years. Those are pretty solid gains — and a higher return than you are most likely paying in interest for your good debt. So, over time, it can make sense to keep that debt outstanding and invest in the markets, to give you the potential to earn the difference between the two.

But this is also a personal choice. Some people simply prefer to get debt — even low-cost debt — paid off and done with. Which of course makes some sense. In general, yes, I do think it’s good to pay down even good debt when you can. Got it?

Okay, I’ve got it now.

Great! Go get it.


Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.


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