- Different investments provide different returns.
- You want to maximize the potential returns you earn on your money.
- Mark Cuban believes paying off your credit cards is the best investment you can make.
Should you follow Mark Cuban's advice and make this investment?
Mark Cuban is a billionaire entrepreneur who is well known for serving as one of the main "sharks" on the popular show Shark Tank. Cuban knows quite a bit about investing, so listening to his advice could be smart if you're trying to figure out what to do with your money.
Although there are many different kinds of investments, Cuban recommends a particular one for maximizing your potential returns. Here's where Cuban thinks you should be putting your money.
Here's what Mark Cuban thinks is the best investment
According to Mark Cuban, "The best investment you can make is paying off your credit cards, paying off whatever debt you have."
Cuban argues that repaying debt can be the best thing to do with your money because the interest you avoid paying your creditors equals the return on investment (ROI) you get. And, in the case of credit cards, that return is usually very high.
"Recognize that the 18 or 20 or 30 percent you're paying in credit card debt is going to cost you a lot more than you ever could earn anywhere else," the billionaire said.
Is Cuban right?
Cuban makes a solid point about paying off high-interest debt. When you pay off your debt ahead of schedule by making more than the minimum payment on it, you get a guaranteed return due to the money you save. And it's really difficult to beat the returns that come from paying high-interest debt.
An S&P 500 index fund, for example, provides a 10% average annual return on investment over the long term. This is widely viewed as a barometer of the performance of the stock market as a whole, and as a benchmark against which to measure the performance of other investments. While you could potentially beat this 10% return by investing in individual stocks, doing so would expose you to more risk, and consistently earning higher returns is far from guaranteed.
Since you'll get a high ROI if you eliminate costly interest charges, this approach can give you the best chance of improving your net worth in the long run. Once you've finished paying off your high-interest debt, you can redirect the money you were using to make payments toward investing.
What about low-interest debts?
Now, if you have lower-interest debt, the calculation may be different. Paying off a mortgage ahead of schedule, for example, will rarely provide the best possible returns. Since your interest rate on your home loan is probably around 4% or less, you could easily beat the ROI from early payoff even with a relatively safe investment in an S&P 500 fund.
Cuban does address long-term debts like mortgage loans, suggesting that when you can't pay them off quickly, it makes sense to reduce your rate by refinancing. Making the minimum payments due and securing a refinance loan when you can drop your borrowing costs is often the best way to deal with this type of low-interest loan.
Ultimately, you should consider your own unique financial situation when deciding where to direct your dollars. But listening to Cuban's advice and focusing on investing your money in repaying high-interest debt is a good approach to take, with plenty of evidence that it will provide you with the best possible returns.
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