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How to invest while paying off debt

By ATB Wealth 21 July 2022 3 min read

With the highest inflation we’ve seen in 40 years, and multiple interest rate increases from the Bank of Canada, consumers are feeling the pinch almost everywhere they spend money – which makes it that much harder to quickly pay down debt or find extra cash to invest. 

According to a 2021 Equifax report, Alberta leads the country in highest average debt with the average Albertan carrying a debt load of $25,438 (excluding mortgage).

Rather than dwelling on the headlines, we recommend that you focus on the specific impacts to your personal financial situation. 

“If you have a budget in place, this may be a good time to revisit it to get a clear understanding of how your income and expenses may have changed recently,” says Michelle Seymour, Managing Director of Wealth Planning at ATB Wealth. “If you’ve never tracked your income and expenses, this could be time well spent to better understand your current cash flow. 

“For example, you’ll likely find that your transportation and food costs have increased. Similarly, if you have a variable rate mortgage or line of credit or have recently renewed your mortgage, your financing costs may have increased as well. Once you have a good understanding of your current spending, you’ll be in a better position to make a plan for your future spending and saving.”

So what options are available to ensure you stay on track to meet your goals, like paying down debt or saving for retirement? There are a few things to keep in mind. 

Make sure you have a comfortable debt ratio

Before you defer any extra money to an investment plan, make sure you have an emergency fund account of at least a few months’ income and a monthly debt ratio less than 42 per cent. This is the limit that banks use to qualify borrowers on mortgages, so it’s a pretty good gauge when determining your overall debt affordability. Keeping within that limit will help ensure you have the money available to meet your other needs, both expected and unexpected, and also have funds available to save for the future.

Your debt ratio is a measurement calculated by dividing your total monthly debt payments by your gross monthly income.

For example:

Every month, Sam owes $1,500 for his mortgage, $500 for his car loan, and $730 for student loan debt, which totals up to $2,730 of recurring debt​.

If Sam’s gross monthly income is $6,500, his debt ratio is 0.42 or 42 per cent.

If you’re not sure what your debt ratio is, this debt service calculator makes it easy.

Pay off bad debt before investing

While it’s good to put your money to work in an investment plan, if you’re paying 20 per cent interest or more on a credit product, paying off this debt (or exploring a personal line of credit with lower rates) should be your priority. Examples of bad debt would be debt that is accumulated by purchasing consumer goods using high-interest credit cards or other high-interest loans. This kind of debt can really rack up if you aren’t paying your balances in full before the due date and the interest kicks in.

Good debt would be a debt that creates value, such as a business loan, home mortgage and even a student loan. Not only are these types of debt considered an investment in themselves, they also have lower interest rates and could help you accumulate wealth over time. 

Once your bad debt is under control, you’ll be in a better position to consider starting or adding to your investment portfolio. 

Look at the markets

For a new investor, or one looking to build their portfolio, a market downturn (like the one we’re in right now) can actually be a good thing. Lower prices can provide opportunities to build or grow your portfolio at a lower cost. This can add up to significant wealth over time — if we have the patience and discipline to stay invested during market volatility. Investors also need to consider their runway. Investments need time to pay returns, but if you have the time to let them grow, they can be a powerful way to grow your wealth, and worth the effort now to find a way to balance paying off debt with investing for the future.  

A financial plan can help determine your best course of action. An ATB Wealth advisor can work with you to create or update a customized financial plan to determine the right balance for you.

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