In her recent commentary Make Millions From Thousands, Fool Selena Maranjian illustrated the power behind finding a "rocket" stock returning a steady 20% over many years. This inspired two thoughts in me:
- I need to find a headline like that!
- That sounds like a lot of work; perhaps there's an easier way.
Well, I think I'm two for two. It turns out that you don't have to become the next Warren Buffett or finding the proverbial next Microsoft to earn such returns. My method to earn stellar returns is not for everyone (and you shouldn't worry too much if it's not for you), but I can sum it up in six words: Pay off your credit card debt.
Dealing with debt
According to Federal Reserve data, the average household credit card debt for those with at least one card is around $10,000. At the minimum payment of 4% of the outstanding balance per month, it will take more than 19 years to see zero again. Given the choice between investing $10,000 in the market and paying off your balance, the investment would have to earn 28.99%
after tax for the entire 19-plus years to beat paying off the credit card.
Where did I get this 28.99% rate? That's what my credit card company recently informed me my new default rate could be -- the exact phrase was "may automatically increase," whatever that means -- should I make a late payment or exceed my credit line. That's in addition to late fees, too.
Remember, this isn't some unlikely scenario. Missing a payment is much easier than you think; I was two days late when another card changed its billing address, and I didn't notice in time to update my online bill-paying information. Gotcha!
Not for you? Good.
You may not be in a position to realize the full promise of the headline because:
- Your rate is less than 28.99%. That's good.
- You're carrying less than $10,000 in debt. That's better.
- You pay off your balance every month. In that case, go to the head of the class.
It's often true that not wasting money in the first place is easier and less risky than earning money in the market, but it's not always obvious how much of a benefit it can bring. If you're in the first two categories above, do the math and decide for yourself where your biggest payoff lies. For help paying off those debts, visit our Credit Center.
For additional money-saving insights, try a risk-free trial to GreenLight, our new personal finance service. Click here to begin planning your financial future.
Microsoft is an Inside Value recommendation.
Fool contributor John Dutemple, CFA, is President of Compton Advisors, LLC, a Missouri Registered Investment Advisor firm. He owns no stocks mentioned in this article. He can be reached atcompton_advisors@yahoo.com. The Fool has an ironcladdisclosure policy.
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