What would you say if I can show you a way to make 36% return on your money with zero risk? Sounds impossible, right? Well it can be done, as I will explain.
Whenever someone comes to me for advice on how to invest money, the first question I ask them is if they have any credit card balance. If the answer yes, I’ve found their investment. Paying off high interest credit cards is a 100% safe investment. With many credit cards charging 18% interest it makes absolute sense to pay those off because it’ll be pretty hard to find an investment that can make that kind of return, without risk.
Another thing to keep in mind when it comes to investing is to always think after tax. Credit card interest is paid with after tax dollars. If you’re at the 50% tax bracket you’ll have to earn $2 in order to pay $1 in interest. So that 18% credit card interest becomes 36% after tax. How many 100% safe investments can you find that will give you a 36% after tax return? Ya, none.
Still, I find it amazing that many people have investments like stocks, bonds, mutual funds, etc. and still run a credit card balance. That makes absolutely no sense, unless those investments are making more than 36%, you will be better off to sell the investment and pay off the credit card. I will admit that paying off a credit card is not as glamorous as buying a stock, and there is a psychological effect of actually owning something but from a financial planning standpoint, you should be credit card debt free before you start investing.
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I agree for the most part, except, you are forgetting the close to free money in the 42% range with making sure you are maxing out your RRSP contributions each year.
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i wonder how many readers are in the 50% tax bracket.
also, as amazing as it is, some people do have a CC balance, but are paying it off via their investment profits. A friend of mine is/was in 10K debt but managed to execute some strong trades and has cut that debt in half by selling portions of his portfolio and it makes monster returns. Remember, 17% CC interest is per year, so if you can make more than 2% interest monthly, you are still ahead. Its not a wise move, but many people do it and come up ahead. Esp if you have other expenses to offset any income you are making on the market.
Aman@BullsBattleBears’s last blog post: Late Thursday Rally – Friday Outlook
This is the one that a lot of people miss. You have to remember that CC debt which is charged at between 18 and 36% and paid from after tax income which can up to double the actual amount of money you need to earn to be able to pay, which basically adjusts the interest rate to 36% – 72%. When earning money you are forced to pay taxes upon the money earned which means that you have to have a return of 36% to 72% to just break even (27% – 54% if capital gains). It is nearly impossible to find a secure investment that pays 3% lately let alone 10x that.
For those of us in Canada the second place to look for a sizable ROI is your mortgage. Similar rules apply since you are paying with after tax dollars and mortgage interest isn’t deductable (well, normally) so a 5% mortgage hits your earnings as if it was at 10%. Again, it’s hard to find an investment that will return this amount with no risk, but some of us are that lucky so your mileage will vary.
that is true Cam. I guess I was not looking at long term credit card debt when I was writing my initial post.
For some of the people that I know who invest and reside in Toronto, they just balance trans their debt to a low interest card or unsecured LOC and then invest their capital. This capital is not a lot, but with some good day trades, is paying off the monthly 3% minimum along with more of the initial balance. This has excelled paying their debts.
When it comes to taxes, with some of them paying rent, they are off setting a lot of their gains by claiming rent/old tuition/RRSP contributions which help.
I agree that paying debts is paramount for financial prosperity. I have seen some people come and ask about buying a condo when they have a hard time paying their cards off, so its really a paramount topic when good points for both sides.
Aman@BullsBattleBears’s last blog post: Late Thursday Rally – Friday Outlook
As a full time day trader, I really do not think people should trade with credit card money.
90% day traders fail. Pay down your credit debts like John said.
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totally. Not saying that ppl should take a cash advance and invest that.
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Hello Aman, welcome to live in Finland. You’ll soon notice that it’s very easy to find yourself at 50% bracket.
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John, sometimes your posts are so painfully obvious and very funny. Your logic makes complete sense. The very reason the U.S. is in trouble is because people over leveraged themselves in every aspect of their life–> credit cards, mortgage, home equity line of credit, personal loans, etc.
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Hi Philip, you are really leaving out most of the really dangerous stuff in the realm of leveraging like leveraging friendships via social networks in the end nobody has that friendship currency that has been inflated by the network, just test it by asking your wide network to come and help you to clean your apartment.
Jake Stone’s last blog post: Sales stories carnival volume 8
I still remember few posts you did a while back on proper usage of Credit card. I followed your advice and now pretty pleased when looking at my statements
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Oh My God i have not have a credit card so that i can not invest.Really bad news….
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Makes perfect sense. I’ve never had a credit card debt even though I use it to pay all my bills and for as many purchases I can. The trick is to pay off the balance before they charge you interest. This way the card works for you and not the other way around.
John, if I may make a suggestion that may possibly increase the amount of comment on your already busy blog. As a personal favor to an Aussie blogger, could you possibly install a ‘subscribe to comments’ plugin so that I, and anyone else who is interested, can be notified when someone has added a new comment?
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I use to have that but I removed it because too many people complained that they were getting tons of emails because the post had tons of comments!
I totally understand, but then all you need is one that gives them the option. If they do not want to subscribe they don’t have to, and when they want to unsubscribe they can. In that way the user controls their own commenting fate.
You could always use the aweber.com service, and set it up so people have the option of getting a daily or weekly digest of the comments feed.
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Amen to getting rid of the debt. We paid minimums just long enough to get a little cash saved up so we could handle emergencies without using the cards. Now, every extra dime goes to paying them off.
Ha ha, another Jake Stone. This is great. I wonder if most of my comments make as little sense as this one did. Took credit to save up money so that in case of emergency one is not forced to use credit… Good one Stan.
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You’re absolutely right. However people need to understand their personal spending habits.
If you’re the type of person who has been saying for 10 years, “ya I’ll start saving next year” then you probably never will. If that’s you, start saving now, no matter what…even if you have credit card debt. Put money into a 401k or an IRA so you’re forced to leave it alone.
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This is Amazing way of Return on your investment. But how about the people who are in Higher Tax bracket. Credit card purchase is a kind of temptation when one is doing shopping. I always make sure that i pay Credit card bills on time in order to get buried under Debts ..lol
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after this post, it still sounds impossible.
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I quite agree with you. It doesn’t make sense having a negative credit card balance and having investments in shares, stocks, etc that wont yield double or more interest rate on your credit balance.
Nice post.
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Doh, so obvious, still some people don’t get it. Take my aunt for example. She has like 30k debt, still she keeps a 10k investment which offers her like 3%. Countless times I told her the maths of this and she keeps denying it and instead keeps paying interest for her loans. I’m at a loss.
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You shouldn’t have credit card debt. That is the first thing you should try to clear. There are too many people with credit card debt in this country and it is sad. They are living to pay off their debt instead of just living. Greg Ellison
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Good advice, but practically impossible to implement especially in these hard times.
Good post
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Just a thought. If everyone who owns stock and holds credit card debt sold stocks to pay down their cards, how low would the Dow go?
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I’m going to get a credit card but the problem is that I don’t have a document to provide since I work at home.
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I absolutely agree. It just doesn’t make financial sense to invest in stocks or any kind of investment that doesn’t yield more than the %APR on your credit cards.
Before I invest anymore in the stock market, I’m going to finish paying off my credit card debt.
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ah… but what about the low interest cards? The ones that give you 0% for a year? How about the concept of just running up the bill, paying the minimums, and keeping the money you would have spent in the bank? This way, you get a free loan from the credit card companies, and you can make some interest from a bank like ING direct or something. THey may only pay 3%, but you can turn a profit on a free loan.
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I am the person who is afraid of risk because of the limitations that I have, your articles and I highly Conference
Americans love to buy stuff on credit cards and banks are more than happy to lend, so who cares?
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defaults on loans will make you suffer too if you are the next person in line to ask for a loan for a house or car…higher incident of risk in the general population would mean tighter lending rules and higher interest rates so banks are better able to protect their arse.
Aman@BullsBattleBears’s last blog post: Late Thursday Rally – Friday Outlook
Spot on John. But the only place you were wrong was in the assumption people will do things based on “common sense”. I am guilty as well often times but human nature is very powerful and often trumps common sense.
Technically, paying off your credit card isn’t risk-free because it reduces your liquidity. Yeah, you have no more debt, but you also have no cash, which is a risk in and of itself. So we’ll call it “nearly risk-free.”
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I don’t have credit card debt. What can I do to earn 36% risk free?
I do have credit cards, but I am almost to finish my debt. Now I work online only. SO I need them a lot.
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Awesome post and very true! Love it! Thanks for bringing me a new thought.
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I am going to say right now, math is not my strong suit. I read what you are saying, and you are probably right but I can’t figure out the who’s and how’s of it all. But right now we have one small credit card balance (less than $500) and other than that we are strictly cash and carry. We have the CC for incidentals, emergency, and such.
It is great advice though to get out from under the credit card, thanks John.
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you had me going there for a second, no credit card debt for me
I have a card, but am afraid of taking risks. So I think investments wont really work for me. :p
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That makes a lot of sense. Too bad I don’t have any money to invest so I can not invest and pay off my debts.
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I have credit cards and i never leave any debt in the end of every month. This doesn’t mean i earn 36% per annum, it can only mean that i never lost my money by paying it (the interest) to the banks.
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Grat post, I hope it works
I will try it!
Very good advice.
Next time I moan about paying off my credit card bill I shall remember this.
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But let’s not forget the concept of good debt and bad debt.
True, credit card debit at 18% is BAD debt. But not debt is bad. An example of Good debt are the 4.25% mortgages being written today. I would make minimum payments on a 4.25% mortgage. Whatever extra cash would have been going to extra payments could be invested in assets paying a higher return (like SPDR ETF should do over the next 2 years).
The real trick to getting rich is borrowing money at a lower rate than you can get putting it to work. Once you find that, just keep repeating it.
I read this post but still I could not find the answer to “How to make 36% risk free return”.
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That’s what I’m saying man! I tell my brother this but he’s stubborn! I have only a 12k limit and I have no balance! I pay it off as soon as I get home and transfer my funds over! Yeah…only 12K limit…but hey…it’s pretty good for a college student man!
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This post of yours forced me to think again.
Certainly this one can be a baby of a sharp mind like you.
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Sage advice John, I have been in the investment business for a long time and it always amazed me that people were stoked with 10% potfolio returns when they had not paid their cards off….
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wow…great method john..keep going
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