A credit card with a 22% interest rate can go up faster than almost any stock you get. But this is not good for you.
Many people who start investing forget this step. They open an account for investing, put in $200 every month, pick a basic stock fund, and keep a running balance that takes away all the money they could gain. You should find out how much you are really paying for your debt before you pick anything to invest in.
Get an Honest Look at What You Owe
Many people do not know the total they owe. They do not know their interest rates or which card is worst. Not being clear about these things is a big problem. That is why credit counseling online is a good idea for people who want to start investing. In about an hour, a nonprofit counselor looks at your income, spending, and debts with you. After that, you get a simple plan for your budget and they will give you your credit report. The first talk is usually free and booking it does not mean you have to do more.
You can do this while sitting on your couch. You can do it during your lunch break or even by phone. There is no need to go to an office. There is no sales pitch. You just get your numbers laid out in front of you.
Why Paying Off Debt Is the Best Return You'll Get
Here is the math that can change the way you look at your money.
The stock market usually gives about a 10% return each year before prices go up from inflation. Some years, the market can drop a lot. If you pay down a card that charges you 22%, you get a sure 22% return. You do not take any market risk with this.
Every $1,000 you pay off from that card helps you save about $220 in interest each year. There is not any fund manager out there who offers that kind of deal.
This does not mean you have to stop investing if you have some debt. Here are a few things to keep in mind:
- Always take an employer 401(k) match. You get a fast return here that you do not find in other places.
- Low-rate debt can wait. A 4% car loan or mortgage can stay with your other investments, and that is okay.
- High-interest revolving debt can't. Credit cards and payday loans are the first things to pay.
What a Good Counselor Actually Does
According to the Consumer Financial Protection Bureau, credit counseling groups can give you advice about your money and debts. They help you make a budget and show you how to manage your money better through classes. Most are nonprofits, and their team knows about credit, debt, and making a budget.
A good counselor will not tell you to choose just one thing. They will talk with you about all the real choices you have. This can include:
- A simple budget reset without using any program at all
- A debt management plan helps you put several payments together into one easy payment. This way, you do not have to keep up with many different bills. You only have one payment to take care of each month. This can make things feel less stressful and help you stay on track.
- If your mortgage is causing you stress, you can try housing counseling.
- Bankruptcy counseling, if things have reached that point
The debt management plan is the one that most people want to know about. You pay the agency one time each month, and it will send that money to your creditors. The first meeting is usually free, but there may be small fees if you join a plan. Make sure to ask for all the fees to be given in writing.
Red Flags to Watch For
Not every company that talks about "debt help" is really there for you. You should walk away if an agency:
- Shares a plan with you before looking at your money situation
- Charges for basic educational materials
- Won't put fees and promises in writing
- Pays its staff more when you enroll
Building Your Portfolio Once the Debt Is Gone
The best thing about paying off debt is what you get after. The $400 that you paid to card companies each month does not go away. You can now use it for your investments.
Start by making an emergency fund that can cover your expenses for three to six months. This can help if you have an unexpected car repair, so you do not have to put it on a credit card. You can then set up automatic payments into low-fee funds that are spread out across many places, and just let them grow.
If you are not sure about your money right now, a free credit counseling session online can help you. This is the fastest way to find out where you stand with your money before you add even one dollar to the market.
Conclusion
Smart investing is not about picking stocks first. You need to fix your high-interest debt before you start. The debt you owe at high rates can eat up your gains. When you pay off this debt, you get back more money than any market return can give. Know exactly how much you owe. Take care of your costly debt first. After that, you can start to build your own group of investments that will have space to grow.
What is the one balance you would clear first if you could start tomorrow?
FAQs
Does credit counseling hurt your credit score?
A talk with a counselor will not hurt your score. If you choose to go on a debt management plan, your lenders may close some of your cards. This can cause your score to go down for a short time.
Should I invest or pay debt first?
Pay debt with high interest before you do the rest. Still, you should take any 401(k) match from your work because it's a good thing to do. If your debt has a low rate, you can pay it on time while you also put money into the market.
How do I know a counseling agency is legit?
Choose nonprofit agencies that have counselors with the right certificates. Also, make sure you get all the fees and any promises on paper before you say yes to their help.
