A Safe and Guaranteed Investment you should consider

Dollar savingA great way to get a safe guaranteed investment

The most popular question I get from my clients is how can I get a safe and guaranteed return that is greater than CD’s, which by the way are currently earning a little over 1%.

As you can guess, there are not many alternatives in the investing world that meet the criteria of safe, guaranteed and high return.

But, I do know a way to earn more on your money safely.

Low interest on your savings

I recently worked with a couple that was getting ready to retire and they had a similar question.

During the financial planning process I notice they had mortgage of $80,000 on a home that was worth over $300,000. They also had a car loan with a balance of about $7,000 and one credit card with a balance of $2,300.

At the same time they each had large 401(k)’s which they could not touch until retirement, but also had a joint bank account and a savings account that totaled over $150,000.

The interest rates on the all of the debt varied from 5 1/2% on the mortgage and 6-8% on the car loan and credit card.

Decisions… Decisions…

The answer I gave them to their questions,  “how to do I get a higher safe return” was to pay off your debt with your savings. They were confused and I explained, your rate of return is the interest rate on the loan. By paying off debt is you save the cost of the debt.

So if your loan is 5 1/2 % and your money is in a savings account earning 1/4% then your return would jump dramatically by simply paying off your debt with your savings.

In my example above, we used the savings and cash to pay off all their debt including their home mortgage and that still left them with over $60,000 of cash. They were also able to replenish their savings monthly with the amounts they were going to send to the banks to pay their old loans.

This increase their return to over 5 1/2% from a measly 1/4%. Also, by paying off the debt it allowed them to eliminate the need for higher income in retirement just to service that debt.

Don’t have thousands in savings

If you don’t have thousands in savings like the couple I mentioned above, you can still take advantage of the same principles to earn good safe returns. If you have a car loan or credit cards, simply add a few extra dollars each month to the balance and pay them off early. Other ideas would be to use part of your bonus or your next tax refund. If a windfall should happen to come your way, use part or all to pay down some debt.

Don’t forget your emergency fund

One important caveat to all the above examples is to have an emergency fund established before you sink all your cash into paying off your debt. This is important, because once the money has left your account to reduced your loan you cannot get it back and if you hit a financial speed bump without an emergency fund your whole plan could unravel.

 Questions or Comments

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