Building wealth is all about taking consistent action, and making progress with your finances – there is no “silver bullet.”
The first thought people have is usually one of two things – how can I make more money, or how can I invest and grow the money I currently have?
One of the problems with investing is that there are very few (if any) “sure things.” No matter what you are investing in, the majority of the time, there is real risk of loss.
When I speak with a lot of investors, it appears many are looking for a magical unicorn investment that provides a guaranteed rate of return, but poses little-to-no risk.
But does this exist?
DEBT IN AMERICA
A common issue most Americans run into is their ever-growing debt burdens.
In recent years, consumer debt has been on the rise.
There was a handful of years just after the 2008 recession when US household debt was on the decline. It seemed like people were being smarter with their money, saving more and using less credit.
But in 2013 that trend changed, and household debt has been on the increase for several years. In fact, US Household debt just reached $13.5 Trillion, and we are seeing increases in most major categories.
Total credit card debt is now over $1 Trillion, with the average American balance sitting at $6,375.
Mortgage debt is just shy of $9 trillion
And Student loans have reached $1.3 trillion, with an average debt load of $37,172 per graduate.
So, what does all of this have to do with investing?
PAYING OFF DEBT AS A GUARANTEED RETURN
If you look at debt in a different light, it can actually be a sure way to earn a return on your money.
Think about it.
Let’s say you have a chunk of money, and you want to be smart about it and do something positive. You have to evaluate what is the best course of action for that money.
If you have credit card debt that you are paying an interest rate on, every time you pay off a piece of that debt you are locking in a return (savings) on that money.
The current national average for credit card interest rate is 17.14%.
If you are right at that average, anytime you pay off part of that debt, you are locking in a savings of 17.14% over the proceeding 12-month period. And that doesn’t even include if you were to maintain a balance longer than 12 months, which would make it an even larger savings.
WHEN IS PAYING OFF DEBT THE BETTER “INVESTMENT?”
The difficult part about evaluating what to do with your money is knowing which is the better decision.
For example, many people feel a strong desire to pay off their student debt as fast as possible. For many, I actually advise against doing this.
When you are dealing with a lower-interest debt like student loans (Current national average is around 5.8%), it can actually be a better decision to focus on building what I call your “financial boat.”
The idea is to take any additional money you have (above the minimum payments) and put it toward building your financial foundation so that you are more resilient against any unexpected shocks. (To read more about this strategy and how to implement it, click here!)
Once you’ve built up a strong foundation, then start putting money toward more aggressively paying down your debt.
However, if you have a lot of high-interest rate credit card debt, you need to make sure you are attacking it much sooner. It will be really difficult to imagine investing in other areas that will provide a return that will outweigh such a high interest rate.
WEIGHING YOUR OPTIONS
In the end, evaluating if you should pay off debt first or invest your money elsewhere is a difficult decision. You are trying to choose between a known and an unknown rate of return. So, the choices aren’t always clear.
But any way you slice it, by paying off your debt faster you are locking in a guaranteed savings on that money.
It might not be as sexy as investing in a new tech stock, but it is one of the few ways that you can actually guarantee you are making a positive impact on your wealth.