The Confident Investor

The absolute best investment that you can make is to pay off your higher interest loans!

If you are carrying any credit card debt, you are probably paying double digit interest rates. This is short term money so you have to put yourself on a budget and pay these debts off. Whatever your current interest rate on your credit card, that is exactly the interest rate you will effectively earn by paying off that short-term debt. In today’s economy, I don’t know of any other legal investment that will GUARANTEE your return at double digit percentage rates.

If you have a car payment that is over 6% interest rate, that is also a likely target for accelerated payments. Once again, a 6.9% loan on your car means that you are guaranteed to get 6.9% return by paying the loan off more quickly (minus inflation). Since car loans rarely go longer than 60 months, this is medium term money (as opposed to short-term for credit cards). If you don’t need the extra $100 in the next month, spend that money on your car loan.

However, you may have bought your car with a subsidized loan from the manufacturer and therefore paying a very low rate that is approaching 0%. In that case, you may want to slow down this payment and only pay the minimum amount that you can. Essentially, inflation will grow faster than your interest rate so your cash equivalent spending will go down over the course of time. In this case, you are earning whatever the inflation rate is in interest!

Your home loan is probably different. Chances are you have been able to drive your interest rate down below 8 or 9%. Your home loan may still be 10, 20 or more years left so any money that you put into it is very long-term. You may need this money before the 10 years are up and if that is the case then it will be quite expensive to get it back out. It is reasonable to pay a bit extra on your home loan but be careful that it doesn’t impact your regular cash flow – and pay off your credit cards first!

In order to do all this, you need to start budgeting your money. Check out these sites for some advice on how to successfully budget your money.

[save] Budgeting for Dummies

How to budget your money for debt relief

The Fluid Budget