Should You Invest in Stocks While In Debt?

Cooper Haywood | October 22, 2022

Summary: Are you wondering if investing in stocks is a good idea when you have debts to think about? Well, it depends on certain factors, such as the type of debt, your income, how you feel about debts, etc. If you are being sued for a debt, use SoloSuit to respond so you can get back on track financially and start investing.

Buying stocks is essential to your financial growth. While you might not see the results of your investments initially, you will realize that you made the right choice as time goes on. However, is it wise to invest in stocks first or clear any pending debt you have?

In this article, we will discuss the importance of investing and how to handle getting out of debt so you can invest more in your financial future.

Paying debts is important

You do not have to worry if you currently have debt, as many people are just like you. From student loans to mortgages, people are paying off one thing or the other.

However, it would be best if you aimed to get rid of any pending debt before investing because the return you receive from investing might not be enough to cover the interest rate of your debt. This technically means you are not making a profit.

For example, Apple stocks could give you an annual return of 15%, but you might have debt with 30% interest. At the end of the day, you will have to use the return as well as other funds to settle your debt.

With that said, not all debts are the same. There is good and bad debt; you should aim to clear off bad debt before anything else.

What is good debt?

Good debt is any debt you incur with a low-interest rate, which tends to give you a high return rate. An example of this would be taking a loan to build a house you plan on renting out. With time, you will be able to pay the debt rental income.

What is bad debt?

On the other hand, bad debt is any money you borrow with a high-interest rate to purchase things that do not yield a profit—for example, borrowing money to buy a car, clothes, or electronics.

It is vital to tackle bad debt first because you might be saving hundreds or thousands worth of dollars in interest. However, investing might be wise if you have low-interest debt because you should be able to settle the debt using the return from your stock investments.

How to handle high-interest debt

Luckily, there are various options to consider when trying to pay off your high-interest debt. All options are valid, depending on your current situation.

The most important thing is to clear off any bad debt before considering growing your money or investing long-term. Here are steps you can take to offset your current high-interest debt:

Do a balance transfer.
Use a cash-out refinance or take a home equity loan.
Take out a debt consolidation loan.
Contact your lender for help.
Start a side hustle.
Seek the assistance of a debt relief company.

Below, we explore each of these steps in detail.

1. Do a balance transfer

If you have credit card debt, you could do a balance transfer. You should transfer all your balances to a card with a low-interest rate and pay your debt there.

In some cases, you might find a balance transfer credit card that offers promotions in which you would have to pay 0% interest for six to 18 months.

This promotion is beneficial if you want to pay off the balance immediately without worrying about additional interest.

2. Use a cash-out refinance or take a home equity loan

This option only works if you own a house. You could try using money from a cash-out refinance to pay off any credit card balances.

Alternatively, you could take out a home equity loan and use that money to pay off your debt. Afterward, you will be left with debt that has a lower interest rate, which you should try to pay off as soon as possible.

3. Take out a debt consolidation loan

As mentioned, loans are normal for most people, so there are typically solutions to these issues. One of these solutions is a debt consolidation loan from banks or third-party lenders.

These lenders would give you just enough money to settle all your other debts, leaving you with only one debt to clear off.

4. Contact your lender for help

You should consider contacting your lender if your extra cash is insufficient to cover your minimum monthly payments.

The lender might be willing to reduce the debt's interest rate or your minimum monthly payments.

5. Start a side hustle

Starting a side hustle to pay off your debt is a fantastic idea because you can achieve your financial goals faster. Furthermore, you can use the extra cash to invest in stocks when you are done paying off the debt.

Testing websites is one way to get additional money online. For instance, Usertesting.com connects companies with customers eager to try out their products. Then, each test pays testers $10. And if your shelf is cluttered with books that’s no longer being used, you can sell them on Amazon.

You can also start a dropshipping business. Dropshipping is one other way to earn extra income without keeping any item in stock. Did you know that you can even start a dropshipping business without a capital?

6. Seek the assistance of a debt relief company

If you think you need debt help, consider reaching out to a debt relief company because they will be able to handle negotiations on your behalf.

However, it would be best to be careful, as numerous scammers are out there. These companies would charge a hefty up-front fee and then do little to nothing to settle or lower your debts.

You can settle your debt with SoloSuit's help.

Respond to a debt collection lawsuit

If your debt becomes unmanageable, you might find yourself in the middle of a debt collection lawsuit. You should know that the most important step to fighting a debt collector in court is to respond to the case.

90% of people who are sued for debt automatically lose their case because they don’t know how to respond to the court Summons and Complaint. SoloSuit makes the process simple by offering a software that helps you generate your own Answer document to file into the case.

When you get sued for a debt, you have up to 35 days to respond before you lose by default, depending on where you live. If a default judgment is ordered against you, the debt collector can garnish your wages or put liens on your property. Avoid a default judgment by responding to the case with a written Answer.

Let’s consider an example.

Example: Collin is getting sued for an old credit card debt that was transferred to a debt collector. He uses SoloSuit to respond to the lawsuit. In his Answer document, Collin uses the expired statute of limitations on debt as one of his affirmative defenses. With this defense, the case gets dismissed, and Collin can now focus on investing his money in stocks and growing his wealth.

You can draft and file an Answer in all 50 states with SoloSuit.

To learn more about how to make an Answer to a debt collection lawsuit, check out this video:

Responding to the lawsuit will increase your chances of winning and make it easier for you to recover financially. This will help you prepare to invest your money and grow your finances.

Investing is important—here’s why

Investing is an integral part of reaching your financial goals, and while paying off debt should come first, you should not completely neglect making investments.

Before investing, you need to understand that investing has growth potential, but it also comes with some risks. Therefore, you must evaluate your risk tolerance and how much you are willing to risk.

Firstly, you should know what stocks to buy. If you invest correctly and everything goes well, your money will grow from dividends. Alternatively, you could make a profit if your stocks increase in value and you sell.

The best way to ensure that you make the most out of investments is to take three actions: investing early, reinvesting your profits, and diversifying your portfolio.

Most people, especially younger people, do not invest in stocks. This is probably because they fear the unpredictable nature of the market and how much they could possibly lose.

However, if you do not take advantage of early investments, you may lose out on years of building your wealth.

Consider these factors before investing in stocks or clearing debt

Ultimately, choosing to invest while in debt or knocking off the debt before investing is up to you. That said, here are a few factors to consider before making that big decision:

Work with a budget.
Create an emergency fund.
Take advantage of your company's retirement plan.
Consider how you feel about debts.

Let’s take a moment to break each of these factors down further.

Work with a budget

Before worrying about investments or debts, you must consider your necessities. Do you have enough money to take care of rent, groceries, transportation, or other fundamental needs? If you do and still have enough money left over to handle other issues, that's great.

It is important to create a budget plan. Having a budget plan can give you a sense of financial control and make it simpler for you to save money for your objectives. Calculate your income, track your expenses, make a list of your short-term and long-term financial objectives, then you plan your daily and monthly budget.

Create an emergency fund

Life is filled with unexpected events, and you do not want to be stranded when these instances occur. This is why you must create an emergency fund before investing or clearing debts.

Imagine having to pay medical or car repair bills, and you do not have any money to do so because you invested in stocks or settled some debt.

It can be troubling because you would have to take out money from your investments, which would attract a penalty (fee). Or, you might be tempted to take another loan with a higher interest rate.

With that in mind, you should always set some money aside for emergencies. With these funds saved up, the chances of you needing to disrupt your investments or increasing your debt reduce drastically.

If you currently have high-interest debt, you do not have to save high amounts initially. You can start small until you've settled the most expensive debts. As a rule of thumb, save up to three to six months worth of expenses.

These funds could come in handy if you lose your job, decide you need some time off, or cannot work for any other reason.

Take advantage of your company's retirement plan

Depending on where you work, your company may offer a percentage of your 401(k) contribution, which is essentially free money you can either use to invest or pay off your debt.

You should take advantage of this plan because if you do not, you are basically losing free money you could use to resolve financial issues in your life.

Consider how you feel about debts

Looking at things logically, you can easily find reasons why you should prioritize investing over paying debts or vice versa. However, numbers are not the only factors to consider when making your decision; you must also consider how you feel and your risk tolerance.

Having a debt to worry about can be stressful for some, and it can keep you up at night or even hinder your daily activities.

If you happen to be one of those people, then there's nothing wrong with wanting to clear your debt, be it low or high interest, before venturing into stocks.

Conclusion – Investing in stocks or paying off debt

In the end, choosing to settle a debt or invest depends on your personal financial circumstances. Try comparing your investment return and how much interest you have to pay.

Choosing to pay off debt before investing is valid, but you must ensure that you pay your monthly sums on time. This is because late payments will hurt your credit score and could leave you with higher interest rates in the coming years.

If you are struggling with debt and don’t know how to battle debt collectors, SoloSuit can help.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

Respond with SoloSuit

"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James

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>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate