Investing Is Pointless When You Have This Kind of Debt

Two women at a meeting with a financial advisor.
Ferran Traité Soler / Getty Images

Everyone from institutional investors to Reddit warriors seems to have gotten involved in investing this past year. Cryptocurrency mania and disposable income in the form of stimulus money have fueled one of the biggest stock buying frenzies in history, making just about everyone somewhat versed in the world of investments.

See: 3 Alarming Ways Women Are Lagging Behind Men When It Comes to Their Finances
Find: Stocks to Buy With Your Stimulus Savings

Financial content on what to buy and when, and how high it will go, is everywhere, but there is a vital thing to consider when building your portfolio: Are you in debt?

Something you don’t read much about in financial media is how financial advisors approach clients with credit card debt. In almost every instance, advisors will decline to take you on as a client if you have roughly $5,000 or more in credit card debt. While this is no magic number, there are a couple of reasons why it’s a helpful threshold.

See: How Much Debt Americans Have at Every Age
Find: Paying Off Debt vs. Building an Emergency Fund — The Experts Weigh In on Prioritizing

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First and foremost, it is inefficient to invest in anything — yes anything — if you have credit card debt. This is because credit card debt is one of the highest interest rate loads that exists. For example:

Say you have $5,000 owed across two cards. The interest rate on those cards is likely somewhere between 17% and 22%, meaning the amount you owe increases substantially every month.

Now say you have this debt but want to invest at the same time. You’ve seen enough “to the moon” pieces and hot stock tips that you feel you’re ready to take some relatively safe positions. You pay a little more than your minimum credit card payments each month, eating away at the interest little by little, and you still have money left over to invest, so you think it’s a good idea.

See: What Not to Do While Trying to Get Out of Debt
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The average rate of return in the stock market has hovered around 7% to 8% over the past 50 years. This includes booms, crashes, recessions, bubbles, bursts — everything. This is what you should expect to make in a typical investment account.

Sure, you could put all of your money into Bitcoin the same way you could go to Vegas and put it all on red. While this is technically investing, it is also gambling, and there is a spectrum across which it operates. If investing wasn’t an option, and you had $5,000 in credit card debt, would you still play roulette? If the answer is No, then apply the same logic to betting on volatile investments while you hold debt.

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See: 10 High-Risk, High-Return Alternatives to Bitcoin
Find: 9 Safe Investments With the Highest Returns

Even if you were to average 10% or 15% in the market, which would be exceptional, reduce those gains by whatever amount you would be paying in short or long term capital gains tax — that’s how much you’re actually making.

Holding credit card debt is simply never worth it. Investing is a wonderful way to build wealth and future savings, but it is inefficient to participate in if you are indebted.

But that’s not the only reason financial advisors shy away from the client who owes $5,000 to credit companies. Another is that one more financial stressor can potentially create a problem for clients.

See: How to Get Out of Debt — A Step-by-Step Guide
Find: 9 Ways to Negotiate Your Bills and Get Out of Debt Fast

Given considerable income, some people can manage less than $5,000 in debt in a couple of months. In those cases, advisors will suggest that you repay the debt in a short amount of time, and then invest.

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Mark Cuban echoed these sentiments in a conversation with CNBC in 2018. “Just recognize that the 18% or 20% or 30% you’re paying in credit card debt is going to cost you a lot more than you could ever earn anywhere else.”

Indeed, America is a “debt nation,” with debt-holding U.S. households projected to pay an average of $1,155 in interest charges alone this year, according to NerdWallet.

See: Mark Cuban Says the Best Investment Is Paying Off Your Debt — Is He Right?
Find: Paying in Full vs. Partial Payments — Which Is Best for Your Credit Score?

Financial education is as much about what not to do as it is about active investing. Paying down your debt before you actively enter the market is always the right thing to do.

Financial advisors can keep you on track and give good advice for how to manage all of this — but beware of the advisor who’s willing to take your money for investments knowing that you already owe the money somewhere else.

It’s important to note that none of this applies to employer-sponsored plans like a 401(k). Unless your debt is large enough to be burdensome, you should always contribute to your 401(k), as it has tax benefits that traditional investments do not. 

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Last updated: July 23, 2021

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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