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Lesson 3. How Much Do You Have to Invest? > Determining Your Expenses - Pg. 16

How Much Do You Have to Invest? Caution 16 Make sure that the profits you are making from your investments are not being used to pay higher interest rates on debt you are currently carrying. Determine where your money is best applied. This rule about paying off debt before you start to invest is not absolute, however. Many debts, such as a mortgage or a student loan, for example, could not be realistically paid off in a relatively short amount of time. And postponing your investing until this type of debt is paid off would be a bad idea. What is important, then, is to consider where the money could best be put to use. If you have only $100 to invest and you are carrying a mortgage or a student loan of $30,000, applying the $100 to such a large amount would make no noticeable impact. If you used the $100 to purchase a share of stock, however, the money would probably grow substantially during the time it took you to pay off the loan. In this case, it might be a better decision to invest the money rather than attempt to pay off a debt. Each situation will prove unique and must be evaluated on its own terms. In the scenario just given, for example, the stock may not be making as much in profits as the interest charges being applied to the loan. Nonetheless, since the $100 amount would not affect the interest amount, the amount earned by the stock is at least somewhat offsetting the amount being paid out for interest. In addition, a certain amount of debt is a good thing for credit ratings and for learning money management. Debt a good thing? Sure. Most entities that issue credit, such as mortgage companies and credit or charge cards, base a substantial amount of their decision to offer credit to you on previous creditors' reports. These reports are amassed by three companies--TRW, Equifax, and Experian--that pro- vide them, upon request, to the companies that are considering offering you credit. Should you not have any debt, your credit record would be minimal, if it exists at all. Each of these companies will also furnish you one copy of your current credit report annually free upon request. Contact infor- mation for these companies is provided in Appendix B, "Resources."