Now and then, I get this kind of question: "I have $1,000 to invest. Which stocks or mutual funds are risk-free with a guaranteed rate of return?"
That makes me laugh because not only is there no such thing but also someone thinks I am an investment adviser. I am not qualified to advise anyone on the stock market. My investment advice is more unconventional.
Why do we have such a desire to invest? So we can read prospectuses and attend shareholder meetings? No. We want our money to grow. We want to build wealth. We want to increase our personal net worth.
There are two ways you can do that. You can increase your assets or decrease your liabilities. Either will boost your net worth, dollar for dollar. There may be an easier way to grow your net worth than to plunge yourself into the stock market, where the risk could exceed your comfort level.
Let's say you receive a $1,000 bonus. With it you buy shares in a highly rated mutual fund. Your net worth increases by $1,000. Next month, when that hot investment takes a nose dive and drops by 50 percent (could happen), your net worth decreases by $500.
But you have another choice. You can use that bonus to repay $1,000 of debt. Your net worth still increases by $1,000 because you reduced your liabilities without any risk. It's a done deal. There is no chance this "investment" will reverse itself. But wait. There's more.
Investing in your debt pays you interest equal to the amount of interest you were paying on the debt. Really!
Go back to the $1,000 debt you paid off in the previous example. If it was a credit card balance at 18 percent and you were making minimum payments, you were paying $15 in interest each month, or $180 annually. Once the debt is paid off, you no longer will pay that $180 in interest.