Paying Off Credit Cards Is the Best Financial Return for Your Money
If you have credit card debt, you probably already know paying it off is the best thing you can do for your personal finances. What you may not understand is that it's the best possible financial return on your money, even taking savings into account. Here's why.
Over at The Simple Dollar, Trent doesn't say explicitly that you should pay off your credit card debt before saving (and neither are we—in fact we're fans of doing both at the same time if you can), but he does point out that paying off those credit cards is the best financial return on your investment you can make, even including stocks and other interest-bearing accounts. Here's how he breaks it down:
Let’s say you pay off $1,000 on the balance of a credit card with a 15% interest rate. The result of that extra payment is that you’ll owe $150 less on your credit card bills over the coming year – and for each subsequent year.
In other words, making an early payment on your credit card debt is the same as an investment. In fact, I’d argue that it’s an extremely good investment. Accumulating credit card debt is a huge mistake, but if you’ve already got high interest credit card debt, paying it off is likely the best investment available to you.
...First, the return blows away what you can expect to get in an average year from stocks or real estate. Even optimists have a hard time arguing that you’ll beat 8% on the stock market in an average year. It’s a bad idea to expect returns like that with real estate, either.
Second, the “return” you get from paying off credit cards early is tax-free. You don’t owe income taxes on the savings you get from lower credit card bills. However, if you take any capital gains on your stock or real estate investment, the IRS is going to be mighty interested in your moves.
Third, eliminating credit card debt improves your cash flow. Each month, you have a certain amount of income and a certain pile of bills to pay. Investing occurs with the money that’s left over in this picture. However, if you focus on paying off debts early, your monthly cash flow will improve as soon as those debts are eliminated. You’ll have more cash to invest and more life flexibility, too.
Three good reasons, but in short, the end goal of you paying off your credit cards as soon as you feasably can will put you in a better financial position overall, not just from a debt perspective, but also from a cash flow perspective. Once you have them paid off, the money you would have spent maintaining your debt or staying above water can snowball into other, more productive investments for the future. Hit the link below to read the full piece.