From time to time, this kind of question pops up in my inbox: How can I get started investing in stocks and mutual funds that are risk-free and have guaranteed high rates of return?
Of course, that makes me laugh, not only because there is no such thing as a risk-free investment — let alone one with a guaranteed high rate of return — but also because someone thinks I am an investment advisor. I am neither qualified nor licensed to advise anyone on traditional Wall Street, stock market-type investing. But that's not to say I don't have some advice for them.
My investment advice is unconventional, perhaps, but it makes so much sense I think you're going to be amazed. When looking at investments, many people disregard one of the best and easiest places to invest their money — their own debt.
First, let's agree that the reason anyone wants to invest is to increase their net worth by making their money grow. There are two ways to do that. No. 1: You can increase your assets. No. 2: You can decrease your liabilities.
If you have debt, your net worth will increase at the very same rate whether you increase your assets or decrease your liabilities. Here's an example: Let's say you receive a $1,000 bonus with which you buy shares in a mutual fund. At the moment of purchase, your net worth increases by $1,000. If, instead, you repay $1,000 of debt, your net worth still increases by $1,000.
Investing in your debt is risk-free. Using the example above, let's say you bought ABC stock instead of paying off $1,000 of debt. Next month, the stock value drops by 50%. Now your stock is worth $500.
But on the other hand, if you pay off debt with that $1,000 and ABC stock tanks, it does not affect your net worth at all. That $1,000 investment in your debt increased your net worth without any risk.
GUARANTEED RATE OF RETURN
Investing in your debt pays you interest equal to the amount of interest you were paying on the debt. Really! Let me show you.
Go back to the $1,000 debt you paid off in the previous example. Let's say that was a credit card balance of $1,000 at 18% interest. You were paying $15 in interest each month, or $180 annually ($1,000 x 0.18 = $180), because you were making only minimum payments each month.
Once you invest $1,000 in that debt by paying it to zero dollars, you get to keep that $15 in your pocket each month going forward. That is your guaranteed 18% return on the $1,000 you invested in your debt. That kind of return on investment is unheard of these days.
If you have an extra dollar, you can invest it in your debt. In fact, you can invest any amount at any time in your debt, until you have no debt remaining to be invested in! That would not be true of investing in the traditional stock market. It's not unusual for a mutual fund or brokerage firm to require an initial purchase or deposit to one's brokerage account of $1,000 or more.
It makes so much sense, if you have money to invest, to invest in your debt — especially if you are carrying unsecured debt like credit card accounts or student debt — until it is gone! Then what? Should you invest in your secured debts? That's a question only you can answer.
Investing in your mortgage is a conservative approach, but every benefit of investing in your unsecured debt holds true for your mortgage. Every dollar you invest in your mortgage puts you that much closer to owning your home free and clear. Once paid, it's yours no matter what happens to the economy or the stock market!
Mary invites questions, comments and tips at EverydayCheapskate.com, "Ask Mary a Question." This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of Debt-Proof Living, a personal finance member website and the author of the book Debt-Proof Living, Revell 2014. To find out more about Mary visit the Creators Syndicate webpage at www.creators.com.
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