When trying to eliminate credit card debt, it seems counterproductive to invest money that will likely earn a lower return than what you are paying in credit card interest. In some situations, you may wish to temporarily put off your retirement plans.
However, many people mistakenly avoid taking advantage of incentives that exceed what they are saving in credit card interest. There are indeed many situations where you should invest even when in debt.
If you are behind on your credit card, house or car payments, then you should normally put off investing until you catch up your payments. You cannot reach your financial goals while paying late fees or risking a judgment, repossession or foreclosure. All open debt accounts should be in current payment status before investing.
Once you are caught up, then you can more easily evaluate your investing options to decide if you should begin. Investing in a retirement plan is something most people should begin at an early age, since time is often more important than the actual rate of return.
Tax Savings
If you are putting money into an IRA or other tax-deferred plan, you can reduce your income tax liability. This alone is not enough to justify investing when you are in debt.
Tax savings may not cover the extra interest that you are paying on credit card balances. Even so, you should remember that this is an important consideration.
Employer Match
Matching contributions from your employer into a retirement plan create a very strong incentive to begin investing. Many employers provide a full or partial match, up to a certain percentage of your income.
A 25% match guarantees you of an instant return on your deductions. A 100% match doubles your money. This is in addition to whatever interest rate your retirement plan is able to deliver. Failing to take full advantage of matching contributions from your employer is one of the biggest mistakes you can make!
A 100% match could mean that you might only have to contribute $25 per pay period to see $55 go into your retirement plan. Remember that with the tax savings that you can earn, your net pay is reduced less than what you contribute for retirement.
Your employer can provide more information about their retirement plan. If there is no employer-sponsored plan, or if you are self employed, then there are still other ways to invest. However, this brings you back to evaluating whether it is worth prolonging debt repayment in order to invest.
An Accredited Financial Counselor can help review your complete financial situation, including your net worth and budget. They can help you determine whether to invest and how you could proceed.
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