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 hysterically, not only because there is no such thing as a risk-free investment let alone one with a guaranteed high rate of return, but more because someone thinks I am an investment advisor. I am simply not qualified nor licensed to advise anyone on traditional Wall Street, stock market type of 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. 1) You can increase your assets or 2) decrease your liabilities.
If you have debt, your net worth will increase at the very same rate if 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 the 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 $0, 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 of or deposit to one’s brokerage account of $1,000 or more.
It makes so much sense if you have any money to invest, to invest it 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!
Out of debt
As you may know, if you are a faithful reader, I come from a pretty dark financial past. It’s not something I’m proud of, but during the early years of my marriage I ran up an insane amount of unsecured debt. I got hooked on credit cards. The thrill of buy-now-pay-later nearly destroyed my life and that of my family.
How did I ever repay the more than $100,000 I ran up in credit-card debt? Exactly the same way I created it—five and ten dollars at a time. It took me 12 years to create the mess and 13 years to pay every nick of principle, interest, fees and penalties. But we did it!
We “invested” every dollar we could find from working every job that would have me until that monster evaporated in a big fat zero balance! And then we used that same principle to slay our monster mortgage.
Our “investments” paid off in spades. We own our house free and clear and live completely debt-free—and free to invest in a more traditional way. What freedom! Perhaps even more amazing is that from the ashes of my life, came a new career.
It has been my privilege over the last 28 years to lead untold thousands of people out of debt and into the joy of living below their means by inspiring them to save time and money every day!
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