How to Get a Guaranteed 25% Return on Investment
Quick Facts:
- The Average US household has over $15,000 credit card debt
- 36% of the people using Credit Cards don’t know the interest rate on their card
- Penalty fees from credit cards added up to $20.5 billion in 2009
- All figures are for the US and are from Creditcards.com
How to get a guaranteed 25% Return on Investment (ROI):
No, I’m not going to sell you an investment that has a 25% return for $24.99. I’m also not claiming that a certain stock, commodity, mutual fund or hedge fund is going to have that return although some might. And before I scare you away, I’m not telling you to go to your great grandmother for money or beg the bank for a hidden GIC, although it’d be funny to see what kind of reaction you’d get.
It’s quite simple actually. If you have any credit card debt, pay it down! Don’t invest, don’t save, and don’t go out for dinner, or buy that Ice Creamed Cone Shaped Louis Vuitton Bag that costs $1427! Pay down your credit card and you will be guaranteed a 25% return. Let’s look at the details.
Numbers…Numbers…
As I’ve stated, the average US household has over $15,000 credit card debt. I’ve seen a variety of figures but this one will do as it gets the point across. Americans and Canadians alike are in debt. Holding a $15,000 of credit card debt is a sure way to the poorhouse as you have time working against you.
Depending on the credit card and credit card debt you have, you could be paying horrible interest. I’ve seen most credit cards at 18-20% APR (Annual Percentage Rate) but the effective rate you’re paying is much higher as your debt is often compounded on a monthly basis. If you make cash advances on your credit card (withdrawing money at an ATM with your credit card), you could be paying daily compound interest.
I should note that many cards have higher APRs and if you do carry any sort of debt on your credit cards, be sure to know which one has the highest. Department store credit cards tend to have a higher APR.
Putting Tax Into the Calculation
Every dollar you spend is two dollars earned. Ah, the good old wise saying. This isn’t quite accurate as we have differing levels of taxes at different income levels, but it’s a good way to think about how you spend. What this means that if you’re paying $225 ($15,000 debt x 18% / 12 months) in interest every month, you’ll need $450 of income to pay just the interest. For the sake of simplicity, we’ll pretend that your effective interest rate is 18%. Over 12 months, you’ll pay $2,700 on that $15,000 of credit card debt, meaning you’ll need to earn $5,400 just to pay the interest on $15,000 debt without reducing your debt by even a penny! That’s a 36% return! Well over the modest 25% return I guaranteed!
Think About Your Future
Quite simple isn’t it? You always see on TV how important it is to put a set percentage (like 10%) of your income away to invest for retirement and other needs. Unfortunately in the US, the savings rate of households went into negative territory for the first time since the Great Depression. What does this mean? It means that instead of saving, Americans are borrowing more money than they earn, and the loans usually come from credit cards.
When you have credit card debt, the first thing you should do is stop using it. You have to control your expenses and really work on paying down every penny you can of the debt you have on your credit card. If you have a line of credit at your local bank or can get one, transfer your debt to the line of credit, as it will most likely have a substantially lower rate. Don’t get me wrong, a line of credit isn’t the best credit, but it’s definitely better than credit card debt. The 10% interest rate differential could save you $125 a month ($1,500 annually) on the same $15,000 debt!
We’re in rough times, it’s not the Great Depression but most of us are pinching pennies and we need to be financially smart about how we use the limited funds that we have. If you are pinching pennies yourself, you need to have a budget and keep track of all of your expenses. Cut down on things you don’t need. Do you need that movie channel? The Magazine or Newspaper Subscription? Can you bundle up your TV, phone, and Internet for some savings? Can you pack your lunch? Can you stop having a Venti Nonfat No Foam Extra Super Mega Whip Cream Mocha every 4 hours?
Every little bit counts; so get your finances in order today. And be sure to take advantage of the 25%+ guaranteed return for your money if you have any outstanding credit card debt. Once you have any debt on your credit card paid off, you should be like me and pay off your monthly balance in full. This is not only a great way to get rid of interest but also a great way to improve your credit rating and also a way to control your expenses.
Guarantee photo by Vectorportal on Flickr.
