How to Get an 18% Return on Your Money

Getting out of debt is probably the second most popular financial topic on the internet, in the media, or pretty much anywhere. What’s the first? Why, "How to Get Rich Without Working" of course.

Short of being lucky with the lottery or getting an inheritance, getting rich by doing nothing is pure fantasy. But getting out of debt is without question, imminently doable, and actually the first step in accumulating real wealth. It’s also the most difficult for people to do.

The number one thing most folks can do to begin the process, is to stop carrying a balance on their credit cards.

This may not sound like a big deal, but it’s huge in terms of destroying disposable income and any hope of significant savings. Here’s why.

If you carry a balance, then each month you pay a certain rate of interest along with that principal payment. On average, that rate is 18%. Hence paying off the balance eliminates paying 18%, thus giving you an 18% return.

No, this isn’t magic or fun with numbers, it’s real money in your pocket.

Millions of people are diligent about planning for their later years by contributing to a 401k or some other type of retirement plan. Yet these same folks are losing ground each month because they continue to carry a credit card balance.

The simple reason is that the stock market will on average return just over 10%. It’s done this on the whole for more than 70 years. Some years are much higher and some much lower but on average it’s been around 10%.

So if your 401k is earning an average of 10% and you pay 18% in interest, you are losing ground at the rate of 8% per year. Add in 3% inflation and you lose 11%. Add in recent market losses and maybe you’re down 26% for the last year.

Too many people don’t realize that it takes a 50% return to make up for a 25% loss. When was the last time you found a way to make 50%?

And by the way, the credit card companies are not your friend because they give you the "privilege" of having one of their cards. In fact quite the opposite, they are the problem for most people. These guys know all too well how to make tons on money off people who keep a balance on their card.

In fact, accordingly to a commercial I’ve seen a couple times recently, Chase is encouraging people, that carrying a balance is okay, and furthermore offering a way they can know what it is at any time of day or night so they can add to it once it’s dropped a little.

The commercial went like this. Open with a guy in the electronics department of some store. He’s relaxing in a home theater style leather seat, ogling the super widescreen in front of him, thrilling to the surround sound, and salivating at having it all for himself.

Cue Chase, who says in the background that all he has to do is send a text inquiry to his account to see if there’s enough room to charge all this cool stuff.

How’s that for great, huh? Just another dose of instant gratification to further bury the poor schmuck and make sure those monthly payments never stop. Thank you Chase!

But hey, Chase is just trying to make a profit and return value for their shareholders – nothing wrong with that. No there’s not, but I’d like to see them act more responsibly and not exasperate the huge debt problems of millions by encouraging them to act against their own best interests and frivolously add even more debt.

As an aside, here’s a way to actually make some money. Stop paying Chase interest and buy their stock. Actually it’s JP Morgan stock since they own Chase. You may have heard of them – the guys who with a little help from the Fed, gobbled up Bear Sterns at a fire-sale price.

Pretty cool deal since the Fed will back about 30 billion of the risk and all that paper can’t be bad. At pennies on the dollar, I’m guessing there’s enough there to make for a tidy profit.

And no, nothing said here should in any way be construed as investment advice, but for myself, with most bank stocks including JP’s pulled down from the subprime mess, the current price, plus the Bear deal make JP look fairly attractive. Besides they even pay a decent dividend.

On the other hand, paying off credit card debt as a way to substantially increase the return on ones money is something that can definitely be taken to the bank – no pun intended.

Read more on money, getting out of debt, alternate work-styles, retiring early, subprime, etc., in J. Allen’s common sense blog or check out a fancy for watches and the story behind more notable timepieces. You can also find some great deals.