A High-Yielding Investment Strategy Guaranteed to Work, Even in These Tough Times

If you’ve about had it with Wall Street, here’s an investment strategy worth considering: Focus entirely on paying down your debts. Imagine each of your debts and other investment opportunities as steps on this staircase. The higher the interest rate, the higher the step. Your savings account, earning close to nothing at the bank, is on the bottom step, and your cash stash under the mattress would be on the ground floor. 

At the top of the stairs, if your employer contributes, is probably your 401(k) plan. With a substantial immediate boost from what your boss kicks in – it’s an investment opportunity that you probably can’t afford to miss – even given the turmoil on Wall Street.

Next in line, as you walk down the flight, is probably a credit card bill. To earn the most money, put every penny you can toward that priciest piece of plastic, until it’s been paid off, and pay the minimums on all your other bills. Then earn the maximum amount you can on the next step down, probably on another credit card, and then perhaps on a car loan, or maybe your mortgage.

Stocks are a little tricky. Sometimes they’ll be on a higher step than your mortgage, sometimes a lower one. Even though in the very long term, stocks fall pretty high on the staircase, they can take you for quite a ride, as evidenced by the current financial turmoil!

Mutual funds are also tricky, and where they fall depends on what the fund invests in. An all-stock mutual fund is usually going to be higher on the staircase than an all-bond or money market mutual fund, but with a lot more risk.

Climb the Stairs for the Highest Returns
Today's highest yielding, safest investments are toward the top of the stairs, where your debts live. After taxes and inflation, your money earns you virtually nothing at the bottom of the stoop, in a savings account. And on the middle steps, where most of your investment portfolio generally sits (if you have one), chances are good that you’ll earn a respectable rate of return - over the long haul - if you can afford the anxiety and the time.

But up at the top, your money could earn you a pile, risk-free and guaranteed, starting right now. For example, let’s say you owe $10,000 on a credit card at 19%. That'll cost you almost $46,600 by the time it’s paid off, assuming you don’t charge anything else and you religiously send in only the required payments. Invest $25 a month in this debt, and you’ll put $20,921 back in your assets column.

Today’s Best Investments Are Tax-Free
It gets even better, because the money you save by paying off debts is tax-free. You don’t have to pay taxes on money you save yourself by investing in your debts. For example, say your highest rate credit card is at 19%. While that’s a very nice APR to earn, in fact, you’d save yourself over 27% in interest.

How can that be? We pay credit card bills with after-tax dollars - that is, money we've already paid taxes on – and no matter where you live, you pay a lot in taxes. (According to the Tax Foundation, on average, 30.8% of our incomes in 2007 went to pay for assorted taxes.)

It’s Safest Toward the Top
Consider using money you would “normally” be putting in the stock market or savings account to pay off your debts. Not only will you earn more than you could if you put that money into other investment vehicles, but there’s also no risk. Investments in your debts are 100% safe, and the returns are guaranteed and protected from the roller coaster rides common in the stock market.

No matter what’s going on with the economy, credit card users regularly pay at least five to eight times more on their cards than they earn on their savings accounts. So whenever you can, invest in your credit card bills! The only way to beat the investment opportunity offered by the plastic in your pocket would be to put your money into your 401(k) - assuming you’d receive an employer match and the money’s safely invested. Even then, chances are you can still scrape together a few extra dollars to pay down those credit cards each month.

And while more risky investments like stocks might beat your mortgage’s interest rate, if your heart sinks whenever the Dow dives, you might want to send some or all of that money upstairs, too. But you don’t have to get carried away: Having a diversified investment portfolio certainly makes sense.

By seriously investing in your debts now, you'll soon be all paid up ... at which time you'll be stuck. You’ll either have to invest in riskier securities, or in those FDIC-guaranteed options at the bottom of the stairs that essentially earn zip, zilch, zero, nada, rien, sifuri, ling, rei, nul, boopkus. I think this would be a very nice problem to have! How about you?

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 24 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Comments

[David Miller]

Wow, I remember seeing that national debt clock in Manhattan as a little boy. Amazing