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 debt.
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 earn 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 Forbes article, the following top rates are boosting the business models of these familiar names:
(NYSE: JPM): 30%
- American Express: 27%
(NYSE: C): 30%
Capital One Financial
(NYSE: COF): 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 Selena Maranjian owns shares of American Express, a Motley Fool Inside Value pick. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.