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.