If you’re the average middle-class Joe who’s likely in a heap of debt, you may be wondering if you should invest in the stock market when you already have outstanding debt to pay off. It’s definitely a valid question.
You may be hearing all of this random news about the market and what it means for our economy (especially now during a pandemic), and you’re wondering to yourself “Should I do the stock market?”. Which I don’t think is how your English teacher would have told you to say it, but that’s just how it came out.
Look, let’s be honest, most people are completely ignorant about the stock market, while millionaires and billionaires continue making capital gains getting richer and richer (while we all stay broke). But when you’re already in debt, what sense does it make investing in the stock market? We’re just screwed right? Let’s talk about it.
Why You Should Invest in the Stock Market
At what point does it mathematically make sense to invest in the stock market when you have debt? Well, if we just look at the average stock market returns historically then you’ll see the rate of return is around 10%. Adjust it for inflation and then it ranges around 7-8%.
So this is where you tend to hear that if you have any loan whatsoever over 8% then you have no business whatsoever investing in the stock market.
Now, this can be good advice. But personally, I disagree with this statement. In my opinion, there are instances where it still makes sense to invest in the stock market even if you have debt higher than 8%.
Before I get into this though, I want to make you aware of a few things. I’m not a financial advisor and this isn’t financial advice. I’m also not some veteran in the stock market who is worth hundreds of thousands of dollars (or millions). I’m relatively new to the stock market myself, and I also have other debt. In fact, this is the entire reason I created this website. But none of that really matters, what we need to do is just look at the facts and consider why you may still want to invest in the stock market even if you have other debt (possibly even over 8%-with caution).
Timing
There are good times to invest, and there are bad times to invest. If you invest at the right time you could potentially see gains far above the stock market “average” of 10%.
This year is the perfect example. Had you invested after the market crashed in mid-March you likely would have doubled or even possibly tripled what you put in by now (roughly 4 months later).
In that case, you could have taken out a high-interest payday loan and put it all the stock market and it still would have been worth it.
Wait, hold up, let’s just actually do that math to help this make sense to you. I’m going to use a very specific example here so you know exactly what I’m talking about.
Let’s take a look at Tesla stock, in mid-March Tesla shares hit a low of $350.51 and in July reached a high of $1794.99. Let’s do a quick hypothetical and say you took out $10,000 high-interest-rate personal loan and invested that in Tesla stock at it’s low and sold at it’s high.
That $10,000 equals 28.52 shares and would have turned into $51.210.80. Say what!?
Yeah, you could have turned 10k into 50k in about 4 months. This is just one example. There are other stocks that could have netted you much more than that. But I want to give examples us middle-class folks who are basically ignorant about the stock market can understand.
So let’s take a look at the largest company in the world: Amazon. All of us know about Amazon, and this would be considered a safe bet if you were to buy Amazon stock. No, you didn’t get in early before Amazon exploded, but you can feel pretty confident that buying Amazon stock is going to be an investment that will still gain over time.
Where would you be in this same hypothetical with Amazon? Where would $10,000 invested in Amazon put you today?
Well, Amazon reached a low point in March of $1,626.03 and just Friday (July 31, 2020) hit its highest share price at $3,246.82.
$10,000 would now be worth just a hair under $20,000. And this is from making one of the “safest” stock investments you can make. Again, there are other examples of where you could have 10x’d your money or even more. Hell, there was even a stock that jumped over 28x in a day. I’m sure there are probably examples more insane than this that I’m not aware of.
Anyways, back to the original point. What would it have cost you for that personal loan?
A 25% interest rate over 4 months with a $10,000 loan would have cost you about $526 in interest. Again, the example of buying Tesla stock would have returned over $40,000. Hell, even if you had a 75% personal loan rate it would have been worth it costing you just over $1,600.
Of course, these are “perfect examples” of investing at the exact right time which isn’t practical in the real world. But again, there are other examples of investments where you could have doubled or tripled your money in a couple of weeks that I didn’t mention.
Look, anyone who got in at the right time basically made money whether or not they had a clue what they were doing.
Unfortunately, those insane gains are over and the market is close to where it was before the crash in March. This is why it’s so important to save money in the first place!
But yeah, if you’re reading this now. You missed out. It’s too late for all of that. 🙁
That being said the stock market is still an opportunity to make money. Which brings us to the next reason you may still want to invest in the stock market, even with outstanding debt.
It is an Intriguing Way to “Save” Money
Do you already put money away in savings? Do you already make additional principal payments each month to your outstanding debt? If you’re like 4 out of 5 Americans, the answer is probably not.
Putting money into the stock market is basically another way of putting money into a savings account, only with way more to gain.
People tend to shy away because they hear how’s it’s riskier. Well, sure, but again, historically the stock market has always gone up so despite short term volatility, I’d say that long term it’s a pretty good bet if you’re investing thoughtfully.
But again, if the timing aspect of investing in the stock market isn’t there like the examples I gave before, then why buy stock when you have other debt?
Shouldn’t you just make additional debt payments? Well, mathematically this would make sense if you’re only seeing gains that are less than the interest rate you have on debt. Or especially if you see losses!
Obviously the higher interest rate you have on other debt means the more you should consider paying down your other debt as opposed to putting money into the stock market.
But, here’s why I say you may want to still buy stocks even with debt higher than the industry average.
It’s an easy, fun way to “save”.
I don’t know about you but historically I suck at saving money. If I put money in my savings account it usually doesn’t take long for me to decide to take it out and buy something I probably don’t need.
If you invest in stocks, the same is true, you can always sell your stocks, but I think there is much more of an incentive to hold and not sell than if you compare to pulling from a savings account.
Just to point out, you could be paying additional payments towards the principal instead if you have other outstanding debt.
It doesn’t have the same appeal to it though. Paying down debt is great too, don’t get me wrong. And you can choose that route over investing, but I just think that people don’t do that for a reason.
Investing is more of a positive reinforcement. When you pay additional principal towards debt you still see that huge negative number you owe.
When you invest in the stock market you start seeing positive numbers. While paying additional payments to debt is great, I don’t think it gives you the same positive reaction. And you can always sell your stocks and turn around and pay your other debt off at any point.
Something Mentally Clicks
Now this is totally anecdotal, but the minute I bought my first share, something completely clicked for me. Why in the hell haven’t I been doing this my entire adult life?
The endless possibilities flood to your brain about you could be rich right now if you weren’t stupid with your money when you were young and dumb. I mean imagine investing in Amazon at $120 a share? Or Apple? What if you skipped just one $4,000 vacation and put that in Amazon instead?
I say $120 a share because that is exactly where it was trading at 10 years ago. $4,000 invested at $120 a share would have gotten you 33.3 shares which at Amazon’s current price ($3,157 showing in the aftermarket as I write this) would be worth $105,233.33.
$4,000 would be worth over a 100k now! What about you, if you could go back in time would you have skipped that vacation? Or would you still be saying YOLO and downing 40s on the beach? LMAO.
Ok, you may be thinking I don’t have thousands to invest anyways, since I’m broke AF.
You Can Find “Cheap” Stocks in Invest In
What is cheap to you? Because you could literally invest in penny stocks if you want. Those will be a lot riskier but imagine the upside.
But in reality, at $10-30 a share, you can find A LOT of good companies to invest in. For example, some shares I currently hold around this range are Cheesecake factory, Dave and Busters, Viper Energy Partners LP, Pinterest (which recently shot up to $34 a share!), and a few others.
It’s cool to be able to buy shares in companies for such a low price. And hell if you want to buy “safer” shares then you can buy Berkshire B or even Microsoft around $200 a share.
Buy Stocks Instead of Wasting Money on Shit You Don’t Need
My point is, with all of this, is that you probably aren’t going to pay an extra $10 to principal on one of your loans if you decide not to go out for ice cream.
The next time you pick up something in the store you want to buy that you don’t need. Try this. Don’t buy it.
Take whatever amount of money you were about to throw away and buy a stock with it. Was that shirt $16? Were those fancy boots $140? Buy some stocks instead.
Did you just get a 30% discount you weren’t expecting on a purchase you made? Take that 30% you save and put it in the stock market.
Some brokers allow you to add unlimited deposits (mine does) so literally anytime you run into scenarios like this you can add funds with the click of a button on your cell phone.
At the end of the day, you can always sell your stocks and pay off debt anyways.
Conclusion
The stock market can be a great way to make money. In my honest opinion, it isn’t out of the question to start investing now even you have outstanding debt.
For many of us, if we were to wait until all of our outstanding debt is paid off we aren’t going to be investing any time soon, and most people won’t ever unless they make drastic changes to their lifestyle.
The stock market has a proven long term record and has been around for over 200 years. For people who are more less ignorant with money, this may be a way to start building assets, and you can always use these assets to pay off debt later on if you choose.
What about you? Have you done any investing in the stock market? Do you think it makes sense to invest even with outstanding debt? Let me know in the comments below!