by Jet Villamor
One of the most common questions I would usually encounter from people during small sessions that I do for managing personal finance is the question, “What kind of investment will give me the highest rate of return?”
In my rookie years I would normally answer the same query with a long discussion on things like the risk and trade-off factor.
The risk factor is simply what we have been talking about for the longest time. The higher the risk the higher the return, the lower the risk, so is the return, blah, blah blah! (we have had discussions on this before)….
The trade-off factor is when you will have to choose between liquidity or growth. There certainly is a price for anything. When youl go for growth the trade-off most of the time is liquidity. You should be willing not to see your money for a longer period of time for it to grow faster, thereby enjoying a better rate of return than in any other placements.
When you go for liquidity, then you will have to sacrifice the high rate of return. You will never be able to expect a better return for deposits or any other money placements that you simply want to withdraw at will.
This would have been my answer, if I we were asked the same question a year or two before. But I was again asked the same question very recently under a different circumstance and this is what I realized – that the biggest rate of return for any investment of an individual who fondly uses his or her credit card is on simply paying off everything that he/she owes.
Consider this. You have decided to empower yourself financially by starting off to save monthly – you are saving directly from all the sources of your income even before you think of spending some money for whatever reason. Thinking that, you will be able to start accumulating the fund for the future. This savings is put in a regular savings program which is earning practically between 0.5% – 1.75% depending on the size and status of the bank.
While doing the “savings” as you think of it, you are also at the same time leaving some kind of balances from your credit card dues. You are leaving some balances so that you will be able to free up some funds for your savings (does this sound familiar?) A lot of Filipinos are doing this…) People get to prioritize putting funds in savings than in paying off or wiping out those long overdue debts.
The result is very tragic – your debts will get to balloon a couple of times more than your savings. Imagine a credit card penalizing you 3.5% interest on overdue balances. Easily, that would be 42% in any given year. (I don’t have to give more illustrations on this as I know we are all aware of this).
Going back to the question earlier, “What kind of investment will give me the highest rate of return?” – First things first, if you owe some money, specially from credit card companies – the highest rate of return will probably be coming from paying off or wiping out all your debts first. If you wanted the best rate of return, consolidate all of your savings – of course leave some for emergency purposes and pay off all those debts especially those that are charging you exorbitant interest rates. Imagine paying off your debts from a credit card company which charges you 3.5% monthly or 42% annually on your overdue amount – that’s easily a 42% rate of return – right there!
Remember, the very first step into financial freedom is the liberation from the claws of debts.
(for questions, comments, suggestions and reactions email @ jvvillamor@insular.com.ph)
