Investment While in Debt?

Contrary as it may sound, there is such a thing as good debt. Thousand of dollars on a high-interest credit card is bad debt, and there’s no questioning it. But, what about your mortgage or car loan? Is it possible to make money when you are in debt? Sure – after all, multi-billion dollar corporations do it all the time. But how about you, the consumer? A popular question of debt management pros is whether it pays more to invest, or pay down debt. Common sense might point to the latter, but, if you are prudent and look hard enough, you may be able to earn more than the cost of debt by investing.

How is this possible? First off, many of us aren’t in a position to pay more than the minimum due of our debts every month, let alone extra. Mortgage lenders have established a simple yardstick for determining whether a consumer is financially secure: their monthly obligations should be no more than 50% of their monthly income. If you meet this criterion, investing may be a good use of your disposable income, if you can earn back a higher percentage than you may in interest each month. This is called creating value, and it’s not the easiest thing in the world to do. One real life example of creating value is financing a car through a credit union, which offers a low interest rate on the loan, with the condition that the payment be automatically withdrawn from a credit union account each month. If the interest rate on the account is higher than that on the car loan, then you’ve still made money off the interest. Of course, situations like this are rare. A good primary rule is to pay off debt rather than invest, if you have the money. On the off chance that you do find such an opportunity, seize it, and consider yourself fortunate.  ■