September 4, 2006 9:33 AM
Earn 20%, Guaranteed
Is there an easy way to get a guaranteed 20% return? Yes. Just paying off all your credit card debt will do the trick.
There’s a small silver lining to this massive cloud: every dollar of debt you pay off will save you a lot in interest payments you won’t have to make on it. For example, if your credit card’s interest rate is 25%, by paying off $2000 of debt, you’ll save yourself from having to pay $500 in interest on it — this year, and next year, and the year after. That’s sort of like earning $500, or 25%, this year and in the following years.
This earnings-by-paying-off-debt principle works on other kinds of debt, too. If your mortgage carries a 7% rate, extra payments you make on it are essentially saving you 7%. Of course, this is where mortgage-investing trade-offs enter the picture. If you’re pretty sure you will earn, say, 12% in the stock market, you’ll be better off investing your extra moola there instead of grabbing the 7% return. If you don’t think you’ll do much better than 7%, then remember that the 7% is much more of a sure thing.
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