Did you know that the average annual rate of return for a stock from 1999 to 2009 was only 1.3 percent? From 2009 to 2010 it was 11 percent. From 1900 until 2009, the average rate of return was 9.4 percent. To get this kind of return you had to be at least average, and 80% of retail investors in the stock market weren't able to attain average returns. In fact, eight out of 10 investors lost money, largely due to quick holding turnarounds. (Find out how you can make use of that excess cash and improve your financial situation. Check out To Invest Or To Reduce Debt, That's The Question.)
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We're not saying to swear off the stock market, but before you invest in the stock market, try our investment strategy. It will earn you an average annual return of 16.85% and it's a 100% safe investment. You will make money, for sure.
This investment we're talking about is you. Invest in yourself and your family by paying off your credit card debt.
Make Your Money Work
In 2011 make it your resolution to think like an investor. A good investor puts his money to work for him. She makes sure that every dollar that is hers goes to something that provides her a reasonable chance of coming back as more than a dollar.
If you were given a dollar and you were asked to put it to work so it would come back as more than a dollar, what would you choose? Combine it with more dollars and fix something in your home? Buy something collectible? Put it in the bank and let it earn interest? These are all ways to make your dollar return as more than a dollar. However, paying off your credit card interest provides a better rate of return than all of those.
How Your Debt Stacks Up
Let's think in larger numbers. The average household credit card debt in America is around $15,800 but let's round it up to $16,000 just for simpler math. If we calculate our annual interest payments on the $16,000 credit card balance using the average interest rate above and assuming that it would take one year to pay off the debt, we are paying total interest of $1,497.65 but let's call it $1,500.
Thinking like an investor, if somebody gave you $1,500 and asked you to invest it in to something profitable, what would you do with it? How about spreading it out over the course of a year and buying food, a new TV, another toy you want, movies, gasoline or clothes? Or maybe you could use it to make a down payment on a new car.
If you do this, then your $1,500 isn't going to come back as more money. In fact, you'll be lucky to have any of that money left later on when it's time to show how you invested it. You invested your money in to things that have no appreciating value. Families do it every day. We invest our money in to things that have no return. Every time you use your credit card and pay interest on your purchases, you are making an investment in to something guaranteed to be a losing investment. We spend our money not as investors but as consumers and that is one of the main contributing factors to the financial problems plaguing households.
There's hope, though. When you pay your credit cards off and you're not paying the annual interest payments, you get some of that money back to invest in to something that will make you money. Once you do that, only use your credit card when you can pay it off at the end of the month. Take the money that you saved on your interest payments and start paying off your car, then your home. If you want to invest in the stock market, do that only after you are paying no credit card interest.
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The Bottom Line
For many Americans, the reason that they aren't living a prosperous lifestyle isn't because they're underpaid. It's because the money they are making is being invested into things that have a negative return. Buying food is unavoidable, but paying interest on it is avoidable. Buying a car is a must, but buying a new car with all the bells and whistles is unnecessary. Think about every dollar as an investor would. If you were asked to use the dollar to make money, what would you do with it? Those who live debt free can be millionaires even if they aren't making a six figure salary. (Holiday expenses can drown you in debt. Find out how to avoid this festive spending hangover. See How To Reduce Holiday Debt.)
For the latest financial news, see Water Cooler Finance: Goodbye 2010 (And Good Riddance?)