From the title of this post you might be expecting me to recommend a superstar fund to invest in or an unmissable Cypto coin…. But no, I’m talking about something much simpler: paying off your credit cards and other ‘bad’ debts. If you have debts, eliminating them is the best investment you will make this year, beating stocks, shares, property and bitcoin.
Credit cards and other consumer credit are the absolute worst ‘investments’ that you can make. The old-fashioned approach of simply not spending more money than you have has been lauded by numerous investors and billionaires including Warren Buffet, Jay Leno and Mark Cuban. If it’s good enough for them…
The problem is that in our rampantly consumerist society we are constantly urged to fulfil our every desire, even if we can’t afford to pay for it. Sticking purchases on the credit card and paying them off later has become a perfectly acceptable way of managing finances.
The problem is that this kind of wasteful spending can very quickly spiral wildly out of control and before you know it you can have more debt on your cards than your annual salary. Even if you keep a modest sum clocked up on your card, the interest on that debt is high – far higher than the return you could possibly get by investing that money in any asset class.
Which is why the logical first step in any serious financial plan is to pay off unsecured debts. First, stop using the cards – cut them up if you find it too hard to resist temptation. Only use them if you have the kind of steely discipline to pay them off every month, and even that is a risky strategy. Far better to adopt the ‘cash is king’ approach.
A word here on ‘good’ debt, which is not quite the oxymoron it might sound given what I have written above. The archetypal good debt is a mortgage which enables you to attain an asset which will give you equity and usually a return on investment over the long term. The key is to research and find the best interest rates on the market and ensure that the repayments are affordable so that it is not a stretch to make the regular monthly payments. A student loan which opens the door to higher earnings and is not repayable until your salary hits a certain level can also be a debt worth having.
I often hear the Air Miles justification for keeping a credit card but the conditions in which they can be used, including expiration dates, inflexibility regarding dates and an inability to alter or upgrade flights purchased with them, means that often they are of less value than people think. The annual fees and interest payments on credit card debt often offset the value of the benefits, unless you zero the debt each month.
Of course, once you have eliminated your debt, the next step in the financial planning process is to save and invest. That’s when you start building wealth and taking control of your financial future, which is a wonderfully empowering thing.
If you’re struggling to get your finances under control, why not get some help? It is amazing how an objective eye on the situation can help you find the way to tackle debt and start on a more positive path. I’ve helped hundreds of people transform their situation and could do the same for you.
Senior Financial Consultant
I aim to maintain and grow an excellent relationship with each client which lasts throughout their working lives and beyond. I strongly believe that a good financial adviser can make a significant difference to an individual’s financial success and positively impact their lives, which is why I love doing what I do.