Are you struggling with debt but still want to invest? Sounds like quite a dilemma, doesn’t it? The truth is, whether you decide to invest your money or pay off debt, you’ll need to put forth some effort. Both of these incentives require money. Where do you start? The first thing you need to consider is whether you’re dealing with good debt or bad debt. Good debt is money borrowed at a low interest rate and that brings a high return rate, like when you’re buying an apartment complex.
The rental income will cover the debt, which can be done in a few years. Bad debt, on the other hand, is money borrowed at a high interest rate for purchasing things that don’t grow in value or generate income, for instance luxury trips, cars, and so on. If you case is the latter, then the smart decision would be to pay off your bad debt first. Why? Because of cumulative interest. For the good debt, there’s something you can do with your money in the meantime. How? Here are ten ways to invest when you are in debt.
1. Fixed-Income Security
A fixed income security provides a return in fixed periodic payments, and the principal is guaranteed at maturity. This type of investment is different from a variable-income security in that payments do not change based on an underlying measure like short term interest rates. A fixed income security is sometimes known as a money market or bond security, and is basically a loan made by an investor to a corporate borrower or government. The issuer or borrower commits to pay a fixed amount of interest (known as a coupon) until a certain date. The best part about fixed income securities is that they generate regular income, protect against a portfolio’s volatility, and reduce overall risk.
A bond is a type of investment where the investor loans money to an entity (usually governmental or corporate) for a predetermined period at a fixed interest or variable rate. The funds are used by sovereign governments, states, municipalities, and companies to finance a wide range of activities and projects. Bond owners are referred to as creditors and debt-holders of the issuer. Bonds are classified as a primary generic asset, together with stocks and cash equivalents. Most government or corporate bonds are traded publicly on exchanges, but some are traded over the counter (OTC).
3. Peer to Peer Lending
Peer to peer lending is a short term investment that can be great for when you are in debt. It involves lending money to a second party with the hope of getting it back with a profit. The quandary is that P2P lending can be extremely risky if you don’t screen your loans properly. You can minimize this risk by going for the best rated lending platforms only, for instance Lending Club. This averages a default rate of a little over 5 percent, but it can have some really attractive returns.
4. Treasury Inflation Protected Securities (TIPS)
Another way you can invest when you are in debt is through Treasury Inflation Protection Securities, which are offered by the US Treasury. There are two ways these types of bonds can grow: fixed interest rate, which does not change throughout the period; and built-in inflation protection, which is guaranteed by the government. In either case, the value of your investment grows with the rate of inflation. For instance, suppose you invest in a Treasury Inflation Protection Security today that is linked to a 0.35 percent interest rate. This is actually less than basic online savings accounts and certificate of deposit rates, which is not very exciting. However, if inflation rises at 2 percent per annum for the period of the bond, your investment will have grown with that rate and given you a much more enticing return.
5. Money Market Funds
This type of investment is specifically designed for those who are looking to retain 100 percent of their initial principal investment. The fund can also generate a little interest to make the investment worthwhile. The idea is to maintain a NAV (Net Asset Value) of $1 per share. Although these funds are not foolproof, they go a long way towards protecting your cash. In some cases the NAV can drop below 1 dollar, but very rarely.
6. Municipal Bonds
Municipal bonds are issued by the government when it needs to borrow money at the local or state level. This type of investment is also referred to as munis, and is not subject to Federal income tax. This makes it a great investment for those looking to limit their exposure to taxes. These bonds are also exempted from income tax in most states and municipalities, but it is advisable to consult your accountant to ascertain if this is the case in your particular state.
Recently, annuities have become unpopular with investors due to shady financial advisors, who tend to over-incline individuals to an annuity that is not the right product for their specific financial goals. However, annuities can be a great investment for people who need to stabilize their portfolio over an extended period. Annuities come in a wide range of options, but they are all synonymous to making an exchange with an insurance company. They take a large sum of money from you in exchange for a predetermined rate of guaranteed return. When the return is fixed it is known as a fixed annuity, while variable annuity is when the return is variable.
8. Preferred Stock
Preferred stock resembles dividend stock in terms of concept. It is a type of stock issued by companies with both a debt portion (bond) and an equity portion (stock). In terms of payouts-to-forms of investments, they are second to bond payments and first to common stock dividends. While preferred stocks are not as popular as common stock, they tend to come with less risk. They give you the ability to own shares in a company while receiving dividend payments.
9. Dividend Paying Stocks and Mutual Funds
Mutual funds and dividend paying stocks are one of the easiest ways to earn some interest on your investment. The problem is that choosing individual stocks is not always easy and there is a risk that the company may go down and plummet with your investment. A better alternative would be to put your money in a dividend stock mutual fund. Once you invest the money, the company looks for attractive stocks while you sit back and relax. It also comes with some diversification to prevent your entire investment from going down the drain.
10. High Yield Savings Account
If you are looking for a no-risk way to invest your money while in debt, consider using a high yield savings account. These accounts offer a nominal amount of interest for simply depositing your money. The process is also simple. Apart from opening the account and depositing the cash, you’ll not need to do anything else. Be sure to find a bank that has a reputable record of providing excellent customer service, easy deposits, online account management, and easy access.