Saving money stinks these days. Borrowers are having a field
day, with interest rates near record lows. But on the flip side,
savings accounts, CDs, and money market funds are paying out close
to nothing. But one simple investment can help you earn much more
than your bank pays you, and those gains are all but guaranteed.
All you need to do is pay down your debt.
Sure, repaying debt is boring. You may already be making your
usual mortgage payments, or the reasonable regular remittals for
your credit card debt. But whatever the interest rate on your debt
may be, that's the return you can achieve by paying down your
The average 30-year mortgage rate these days is around 4.5%.
Let's say you're paying 5%, and your monthly payment is $1,000. If
you send in an extra $1,000 to pay down your principal, that's
$1,000 that you won't have to pay 5% on. Instead of paying 5%, you
it. Think about that choice: You can earn, say, 1% in a bank
account, or earn 5% by paying down your debt (which also builds
your equity more quickly).
The average annual percentage rate (APR) for credit cards recently
hovered around 13.7%. Pay down any debt that charges you that rate,
and you've instantly earned 13.7%, which handily tops the average
annual stock market gain!
In addition, many credit card issuers have been enriching
themselves and their shareholders by charging steep penalty rates
to borrowers. According to a recent
article, the following top rates are boosting the business models
of these familiar names:
) : 30%
) : 30%
Capital One Financial
) : 29%
Yowza! Just think of all the money these issuers are making off
rates like these. If you owe $10,000, as many people do, you could
be forking over $3,000 per year in interest alone. That will
certainly make it hard to pay off the principal.
On every billion dollars in penalty-level debt, these companies
are demanding $170 million to $300 million. That's great for
shareholders, but not for borrowers. This is all the more reason to
pay down your debt as soon as you can.
It's very hard and very unlikely to earn an average annual
return of 30% in stocks or any other investment. But by retiring
debt, such a mammoth return is essentially guaranteed.
Longtime Fool contributor
owns shares of American Express, a
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