You’ve found yourself in debt.

Unfortunately, the tough economic climate has made things more challenging for Albertans as they struggle to balance paying off that debt, covering daily expenses and saving for the future.

Even if you find yourself with a little extra cash at the end of the month, it's difficult to decide if you should put it into an investment plan that could help that money grow or dump every spare penny into paying off your debt. There are many things to consider if you find yourself in this dilemma, including your debt amount compared to your income flow, the type of debt you are in, and your personal situation.

What is your debt-to-income ratio?

Your debt-to-income ratio is a measurement that is calculated by dividing your total monthly debt by your gross monthly income.

For example, every month, Jim owes $1,500 for his mortgage, $500 for his car loan, and $750 for other debt (student loans, credit card interest, etc.), which totals up to $2,750 of recurring debt​.

If Jim’s gross monthly income is $6,500, his debt-to-income ratio is 0.42 or 42%.

Before you defer any extra money to an investment plan, it is recommended that you have a comfortable cash cushion in your bank account of at least a few month’s income and a monthly debt-to-income ratio less than 42 percent. 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 ensure you have the money should an expensive incident happen in your life like a job loss, sick loved one that needs caring for, or a major home repair.

If you’re not sure what your debt-to-income ratio is, this Debt Service Calculator makes it easy. Enter your gross monthly income, debt and expenses, and your debt-to-income comparison will be provided instantly.

In certain situations, chipping away at your debt while putting a little into savings might make sense if the risk is low. For example, someone who is self-employed might choose to make minimum payments on a low-interest debt in order to invest a little each month towards growing the business. If you’re not sure what is the best option for you, contact a professional financial advisor for guidance.

Do you have good debt or bad?

Not all debt is created equal, and there is such thing as good debt. 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, tax-deductible benefits, and could help you accumulate wealth over time. It’s important to consider what your debt interest rate is compared to your potential investment return.

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.

It’s a good idea to pay off that bad debt first, before putting any extra money into an investment plan. You’ll save money on interest by paying that off right away. Use those savings to create your cash cushion, and then, when that bad debt is taken care of and you have more room to breathe, consult with a financial specialist at ATB Financial to get professional advice and guidance on starting an investment plan.

What is your investment horizon?

Investments need time to mature. The more time they have, the more they will compound and help you produce more wealth. Even making small investments now, despite of being in debt, and giving that money time to grow can pay off more than investments you will make later in life when you might be debt-free.

If you’ve determined it is in your favour to put a little money into an investment portfolio while you whittle away at your debt, you could benefit from giving that contribution more time to mature.

“Whether you decide to pay down debt or invest, be sure to stick with your decision,” stated Chris Turchansky, CFA, President, ATB Investor Services, in the article Pay down debt or invest?. “If investing is the best decision for you in February, then it’s likely still the best decision for you in April when that juicy tax refund lands in your mailbox.”

Depending on how long you have until retirement and your investment risk tolerance, now might not be the best time to put money into high-risk investments. If you do feel ready and confident in starting a portfolio, a financial advisor can help create a savings plan that will increase your wealth while allowing you to reduce your debt.

Just because you can invest, should you?

Even if you technically can invest while paying off debt, it doesn’t necessarily mean you should. For a moment, forget about the numbers and consider how you personally handle debt. If you feel overwhelmed by being in debt, you might be able to lessen your anxiety by choosing to put all your resources into paying that off. Alternatively, you might see making manageable investments while in debt as a light at the end of the tunnel.

Other factors to consider is the amount and type of debt you’re in, the stability of your income, years you have until retirement and your expected investment return. Get expert advice to help you create your own plan by stopping by your local branch​ to talk to an ATB team member.