Paying off your debt just may be the best guaranteed investment you can make right now.
There’s a term that people kick around when talking about investments: Return on Investment (ROI.. If you wanna be financially fancy). It boils down to the amount you get back from investing money into something. If you buy a stock, the amount that its value goes up in a year is your ROI. If your house value goes up…. Hey, presto… a return on investment.
But as with most things that you invest in, there’s an element of risk. Prices can go up, but they can also go down (I know… mind blowing). There’s no real guarantee of a return on your investment.
And this is where your debt comes out on top.
Every month, you pay someone for the privilege of holding on to your debt, whether it’s the government (student and tax debt), or the bank (credit lines, and cards). The fee you pay for that privilege is your interest rate… and it can get pretty scary over a long period of time.
Let me paint you a word picture:
Meet Dennis: he’s just a normal artistic dude, with a little normal credit card debt.
These numbers are based on the assumption that Dennis stops using his credit card, and only pays the minimum payments every month.
This isn’t a post about how you should pay your credit card faster because it’s costing you a ton of money (or any debt really… credit cards are just the most dramatic example). This is a post about how you should pay down your debt, because it’s the BEST POSSIBLE INVESTMENT FOR YOUR MONEY.
Putting more than the minimum payment towards the balance doesn’t really feel worth it to Dennis. He feels like it’s sucking up money that he could be using to actually invest - in his career, the stock market, or one of those fancy GICs everyone’s talking about.
Dennis might feel like he has a black hole on his hands. But what he actually has in that credit card debt is an investment, with a guaranteed return much higher than any of those other options.
I promise you that if the banks found some way to offer people a GUARANTEED 20% RETURN ON INVESTMENT that Dennis would be losing his freakin’ mind.
It’s important to remember that your finances aren’t just measured by how much money you have in your bank account. It’s a bit more big picture than that. It’s about your net worth (which is basically just your assets minus your debts). So whether you’re increasing your assets, or decreasing your debt… the results are the same…. You, getting into a better financial place.
Right now the money sitting in your savings account is earning just over ONE PERCENT interest. BLERG. And even if you’re in the stock market (which is doing quite well right now… unless you’re invested in Canadian oil fields… then… less well) the returns are probably less AND they’re not a sure thing.
