The Best Type of Investment: Paying Off High-Interest Rate Debt

Daniel Penzing
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Lock in a Guaranteed Rate of Return

With today’s low interest rates, the smart money would seem to be on investing. However, the reality is that investing will almost certainly result in lower returns on your money than paying off some high-interest-rate debt. While this is literally investing in yourself and your family, it is not what most people have in mind when they think of investing. They imagine a life of leisure, and despite what the pundits would have you believe, your money just can’t live the life you want while you’re keeping up with Lifestyles of the Rich and Famous. It is instructive to compare the return on an investment in the stock market with paying off a car loan with an 18% interest rate.

Free Up Cash Flow

Remove Risk From Your Life

What is the first thing consumers want to do when they hit financial trouble? They go out and take on more debt. This is the wrong approach!

The first thing to do is to stop any unnecessary spending immediately. Avoid buying on credit, and eliminate all credit cards, as soon as possible.

You need to start paying off any debt you have that is attached to a high interest rate. If you have credit card debt, you should pay off revolving credit first (e.g., credit cards) and then any non-revolving credit cards (e.g., department store cards, etc.).

You should pay off the credit card that has the highest interest rate, so that you can reduce your cost of debt repayment. The lowest interest rate credit card should be paid off next.

Other credit cards should be paid off in order of the balance amount. This means that you pay off the credit card with the lowest balance first, and save the credit card with the highest balance for last.

Once you have paid off all of your high-rate debt, you need to start investing in your retirement accounts. You do this fitting the investment into the 10% of pay (if you are not already investing in a retirement account). If you are already putting 10% into a retirement account, you should increase the amount to 15%.

Reduce Stress So You Sleep Better

As your mind races to the sound of the alarm clock, your muscles tense and your thoughts are filled with dread. For many people, this is when they realize they’re in the middle of a cash crunch. But it doesn’t have to be that way. You can use a few simple strategies to prevent a cash crunch from ruining your sleep and causing you to be stressed out throughout the day.

Most people with a steady income can live beyond their paychecks and even build up a nice savings account. This feat becomes much, much easier if you stop using credit cards and concentrating on paying off high-interest rate debt.

If your money is going toward the interest on credit card debt, you can’t earn any interest on it and you can’t use the money for anything else.

The first step is to figure out how much you have to pay each month to reduce the amount of outstanding debt you have. This sounds just as simple as it is but it’s really difficult to do.