It’s March of 2021 and we’ve reached the one-year anniversary of the stock market crash where it dropped at historical rates. We had the fastest sell-off ever, and therefore one of the biggest bull markets in history after. Recently we’ve now seen the S&P 500, Dow Jones, and the NASDAQ drop the last several weeks with a bit of a market correction. So again, here we are, and you should be asking yourself if you should invest in the stock market, even if you’re still in debt.
Now, if you’re new to this site, I wrote about this last year a few months after I invested in individual stocks for the first time in my life in March/April of 2020, you can read that here. This is my take nearly a year later on what I’ve learned and what I think we as “normal blue-collar” people should do when it comes to investing in the stock market.
As a disclaimer, I’m not a financial advisor or someone with millions of dollars invested or years of experience (if you couldn’t tell from the previous paragraph) so take this with a grain of salt (none of this is financial advice, but simply my financial opinion.)
But I will say this, investing in stocks has been one of the biggest things in my life to change how I think about money, and has drastically improved my financial outlook. Not just because I made money last year, but because it helped changed my mindset.
I’m sure if you’re a long-term investor with years of experience you’re probably thinking…of course, you got in just in time for the fastest stock market recovery in history. Obviously, it was a positive experience (eye roll). Sure, the fact that I made money gave me a positive outlook on it, but regardless of anything short-term, I plan on building a portfolio out for the rest of my life without expecting it to be all green. Trust me, I’m used to red.
That being said, I think that long term, if you invest with logic and not emotion, and combine that with discipline you’re going to win out.
But why on earth would someone who already has debt put money into the stock market? That’s what we’ve all been told, right? Don’t invest until you’re out of debt, besides maybe a mortgage.
Well, here is the problem with that. Most people are set to be in debt the rest of their life unless something changes. That’s just the fact of the matter.
The stock market is one of the ways that the rich get richer and the poor stay poorer. They invest. You spend.
I know what you’re thinking though. The elephant in the room.
It’s a Huge Risk!!! (Let’s Actually Look at This)
I mean you’re gambling your money, sure you can win big. You could also lose money. Why take that risk? This, is the average person’s thought process, which is why we tend not to invest money.
Unless we’re guaranteed money we don’t want to throw our hard-earned money away! Yet ironically, we take out debt where we pay interest to banks and don’t have any problem doing so lol.
Are the risks too high?
Worst case scenario: We have another stock market crash and enter a recession. You just lost everything you put in, right?
Wrong.
2 things can happen here where you don’t lose a ton of money. Number 1-You can hold all of your stocks through the recession and years later still end up ahead, or 2. You can sell your stocks prior to them reaching lows and buy back in when you feel the stock market is ready to start trending up.
Buying individual stocks gives you complete control of the stocks you hold. In today’s world, with the internet, apps, and brokerages to go through, in 1 second you can sell off your stocks (or buy). This gives you control over your portfolio.
With your 401k or IRA you don’t have as much control as you do with buying individual stocks. Are you going to sell off and buy back cheap with your 401k? No. I mean you can always put a higher % in at times or whatever, but you don’t have that control where you can time the market like with individual stocks. If you were to “sell” you’d either have to take out a 401k loan or take a withdrawal and pay taxes and fees.
This brings up another point. Do you think putting money into a 401k is a bad idea if you have other debt? People who have 401ks are much more likely to better off financially than people who don’t have 401ks, and that is true whether or not they have other outstanding debt.
Your 401k is just a blend of stocks and bonds. Is that too risky too?
Now, disclaimer here, stocks are riskier than 401ks because your 401k is far more spread out. This, of course, also means that the returns you would expect will be likely lower with a 401k. This brings us to the stock market and our original question.
Should You Invest in the Stock Market (If You’re Still in Debt)?
Look, we just spoke about the worst-case scenario where you go into the stock market and we see a market crash. That would suck, right?
But let’s think of it long-term. Looking back the last 100 years and even including the great depression, overall, the stock market goes up.
Here are some numbers to give you an idea of the average stock market return in the last 50 years:
| Time Period | Annualized Return | Annualized Return Adjusted for Inflation |
|---|---|---|
| 10 Years (2011-2020) | 13.9% | 11.96% |
| 30 Years (1991-2020) | 10.7% | 8.3% |
| 50 Years (1971-2020) | 10.9% | 6.8% |
Per moneychimp.
As you can see, your money is moving up. If you just follow the averages. Now, there is also the possibility that you can outperform the market. Good investors do.
But assuming the average return, you’re looking at around 10%. So just from a mathematical standpoint, if you’re paying interest on any loans under that rate then it still makes sense to invest.
Now, I know, we need to be “careful” here. So maybe adjust for inflation and say 8%. Again, technically that would make logical sense right?
Sure, but investing needs to be done as I said before, very thoughtfully. Using logic and not emotion will be a big part of your future success, or lack thereof.
Clearly, there is risk involved, which is why most people who have outstanding debt decide not to invest in the stock market.
Timing is Everything
If you’re going to invest while still having outstanding debts (besides a mortgage) then doing it with a calculated effort will be important. One of the biggest things here is timing.
Whether that be timing the market in general, or just buying stock in a company that is set to explode regardless of the market.
An example of timing the market would have been investing last year when the market dropped. Pretty much anybody who threw money into the market around March/April/May had really good returns regardless if they knew anything about investing (myself included).
The market was down, it was inevitably going back up, so putting money in was a smart decision. If you decided to pay off debt instead of investing last year then you lost out on a ton of money you could have earned.
Let’s take a look at Tesla stock. I used this as an example last year as well after it had basically rallied for 4 months straight at the time, since then it rallied even more amounting to a high point of $880.50 in early February of 2021.
In March of 2020, it reached a low point of $70.10. Let’s do the math. That’s basically a 12.5x in less than a year!
So $10,000 invested at its low in March of 2020 would have been worth $125,606 at its high point in February, less than 1 year later!!!
Who wishes they would’ve got in at that point? Now since then Tesla had a bit of a sell-off, which is pretty much a healthy market correction considering how fast it blew up, but it’s now trading in the low $600 range as I write this article…I know, only a meager 8-9x.
Now in a perfect world, you would have bought the low and sold the high and made out like a king. But it never works out just like that, I just want to layout what is hypothetically possible.
As we look back now, it’s not as if maybe you would have made money. It’s a scientific fact. That’s what I love about looking at these scenarios. You can look back and see exactly what would have happened.
Now I used Tesla as an example here because it was basically the face of the stock market in 2020, but pretty much anything you threw money into you would have made out really well, regardless if you had any clue what you were really doing in terms of evaluating companies, etc.
The 2020 market crash is the perfect example of timing the market. Could all of these companies have gone to zero? Technically that was a possibility, but that scenario was also very unlikely. The question was simply when does the market bottom out and start going back up, and can these companies withstand the pandemic?
Now it turns out that even a lot of the riskier plays would have paid out immensely, and you could have invested in these and done even far better than putting money into Tesla.
But ok, enough of that talk. The crash is over and if you didn’t buy in last year then you missed out. The market isn’t the same now, and instead of shooting fish into a barrel, you have to have a much more calculated effort to see these types of returns. And honestly, you shouldn’t expect to 10x your money in a year or less. But that doesn’t mean you can’t still have good returns that will benefit you more than paying down debt.
Things to Consider Now in 2021 Before Investing
The first thing to consider is whether or not we see a huge market crash in 2021! This market crash scenario has always been the reason that I never invested in my life (outside of a 401k, company stock, etc.) until 2020. It always seemed too risky. But as I mentioned above, we know that even despite these crashes the market historically trends up regardless over time.
Granted, the U.S. national debt has never been like this before and many people see this as a huge concern, others see the stock market as a safer play than having your money sit in a savings account getting outpaced by inflation.
Look, that is always a concern. But the way I see it is looking back, I’ve always held that concern and it’s cost me a shit ton of money. So it’s time to play the game that millionaires and billionaires play. But that’s just me.
However, this means that waiting for a market crash or correction may be a great time for you to buy in. Like right NOW…lol.
We’ve seen the market have a correction for basically just over a month now and since things have cooled off a bit from these crazy run-ups from last year, it may be time to test the waters if you haven’t already been investing (or buying more if you have).
Of course, we have no idea if these corrections are over or will continue, but personally, as of today (March 28th, 2021), I personally think this a good time to buy some stocks, and who knows with this whole Suez canal catastrophe maybe we’ll see even more of a dip (making for an even better buying opportunity).
The next thing to consider then is how much money you want to put in. Do you want to put in a lot of money, or maybe test things out with a small amount of your paycheck?
The less confidence you have the less you may want to put in.
Finally, and this is the most important thing. What companies should you invest in? Again, we’re not shooting fish into a barrel anymore.
Are the companies that had huge run-ups last year no longer a good buy? Are they a sell or maybe just a hold? Tech stocks blew up last year, will 2021 have a new industry take off? Are there still companies out there that have good valuations even with the overall market being “overvalued”? Will a Biden presidency change which industry moves forward the fastest?
These are questions you should be asking yourself if you are considering investing, whether or not you have outstanding debt or not. Clearly, finding the best companies to invest in is what it’s all about!
Why I Am Choosing to Invest While Still In Debt
First off. I love it. Investing in companies is something I really enjoy doing now. The fact that you can be a part-owner of a company is a really cool concept. Sure, you may only have a tiny minuscule fraction of ownership in that company, but regardless you still own shares of that company.
For me, the upside of my investments makes it completely worth it as opposed to just paying off debt I have. I’ve realized that even the multi-billion dollar companies I’m investing in still keep debt on their books. They have assets to go alongside debt and do this strategically to grow their companies.
There is no reason that I as an individual can’t do this as well. Sure, I have outstanding debt. But my opinion is that my investments over the next 5 years are going to be worth even more than the interest I’m paying in debt.
Now, this is another important point. Because it all depends on what other outstanding debt you have. It may or may not be worth it depending on what kind of debt that is.
For example, other than my mortgage, the types of outstanding debt I have are student loans, medical debt, 401k loans, and now margin debt.
So why would this make sense?
Primarily the interest rates on what my other debts are. Medical debt has no interest. 401k loans aren’t technically “loans” as I’m borrowing from myself. So this mostly comes down to me believing in the stocks I can pick individually over my 401k that is far more spread out.
On my student loans, I have a 6.8% interest rate. Now, this is where we’re at an interest rate where you may think it could make sense to pay that down instead (even though we already went over the average return after inflation is roughly 8%), but there are other factors at play here as well.
Federal student loans have several protections if you were to lose your job, etc. Not to mention the current administration has expressed a desire to write off student loans, with numbers floating around of up to 10k in student loans or potentially even up to 50k in student loans.
Now imagine paying off 10 grand in a year only to find out that your student loans would have been written off if you didn’t do that?
Even if it isn’t likely to happen, it doesn’t make any sense at this point with the interest rate being under 8% and having any possibility of loans being written off.
Now, credit cards are another thing entirely. Technically I do use credit cards but pay them in full each month just to get the points, but otherwise, this is something I would pay off before I would invest in stocks
Now granted, last year with the market crash even this wouldn’t have been worth it as we can look back and see, but right now where we’re not in a “once in decades” opportunity then there really is no way to justify investing when you’re paying interest rates of 15-25% on credit cards. If you have 0% for a while then that’s different, just make sure you can pay it all off by the time they start charging interest!
So this is something else to consider, is what kind of debt you have. Is there really any way to justify paying off medical debt if they allow you to make monthly payments when you aren’t paying interest?
Of course you need to pay your obligations first, but if they allow you to make monthly payments why not ride that out and invest your extra money?
At the end of the day investing in stocks has been worth it for me at this point, and the fact that it’s changed my mindset about money may be the most important thing that’s came about my decision to start investing.
Personally, I’m much more inclined to invest money than I am to pay off debt. It’s a positive reinforcement and psychologically helped me reach that “aha” moment.
Stocks Can Be Your 3-6 Month “Savings”
This may be the best reason overall to invest in the stock market, even with outstanding debt you owe. When anyone is telling you to come up with a budget and to plan ahead and then start saving they generally say something about keeping a grand, or maybe even 3-6 months in savings in case you lose your job or something. Only then, should you start paying off extra towards your debts.
I remember trying to uphold this strategy and for the life of me I could never get to 3 months of savings, let alone 6. And it’s quite obvious that most people are in the same boat where it seems next to impossible to do this. And who can blame them? What’s the point in having your money sit in a savings account where it’s technically losing money vs. inflation?
Here is where the stock market is your best friend. As I’ve mentioned you can always sell your stocks and send it straight back to your bank account if needed. So why not use the stock market as your 3-6 month cushion?
This way instead of having your money sit there doing nothing while you stare at it wanting to spend it, you could instead make money off of it, knowing that if anything ever comes up you could sell some shares to come up with money.
Now, the other great thing about this is that once you start investing, you will do everything in your power not to sell those shares. Trust me. You want to see your investments play out. This is extra motivation for you to go out there and make more money.
So what are your total monthly expenses including food and gas? 3-6 grand roughly? So if you expenditures per month are 4 grand then that means you would invest 12-24 grand in stocks before hitting your debt.
And you could play around with this however you want. Maybe put in 3 months worth and if the market isn’t at what you would consider a good market to invest in after that, then start paying down debt instead?
Maybe invest 3 months worth of “safe” dividend stocks that pay you dividends and aren’t as high risk, then put the other 3 months worth of money into high return growth stocks? It doesn’t matter, the idea is that you can sell these at any point if you have to giving you that 3-6 month safety net.
Summary
Investing in the stock market, even if you have outstanding debt may be something you want to consider, despite there being risk involved.
It can potentially be a way to reach your financial goals faster than if you wait until you’re completely out of debt to do so, plus it provides a nice safety net if you need some cash.
What about you? Are you considering investing for the first time? Have you already been investing in the stock market even with outstanding debt? Do you think it makes sense? Is there anything that caught your eye in this article that gave you a new perspective? Let me know in the comments below!