How to guarantee return of 25% on your money

The #1 question that I get is: Jared, how do I guarantee a return of 25% on my money?

It’s true that you can get returns far in excess of 20% in real estate. I’ve demonstrated in previous posts and case studies how real estate investors can see returns as high as 30% or 50% depending on circumstances, but these returns are not guaranteed!

Most of the people who ask me this question are trying to break free of credit card debt. They are searching for a way to escape the daily grind. They want to earn more money in investment income than they spend in living expenses.

The surprising fact for most of these people is that the best way for them to “invest” their money is not going to be found in any real estate portfolio, 401k, or magic stock.

I’ll share the secret at the end of this article, but first, we need to talk about Benjamin Franklin.

What did Benjamin Franklin mean by “a penny saved is a penny earned”?

To understand the secret, we first must understand what Benjamin Franklin meant by his famous quote. Many attribute the quote “a penny saved is a penny earned” to Benjamin Franklin, but what did he mean?

Think about a situation. You borrow $100 at 10% interest. Forget about payments on this, let’s keep it simple. In the most basic analysis, this debt will require an annual payment of $10. If you never pay it off, you will pay $10 every year on this money borrowed.

Let’s look at another situation. You invest $100 in an investment with a 10% ROI. Every year, you earn $10 on this investment.

In the first situation, you are $10 poorer every year. In the second situation, you are $10 richer every year. If you play with these investments, we see something interesting.

First, if you have $100 debt and you invest the $100, then you earn $10 but you pay $10 and you net $0 change. If you have $100 debt and you pay back the $100 debt, then you earn $0 but you pay $0, so you again have a $0 change.

The situations are the same! Saving $100 (by paying back the debt) is equivalent to investing the $100 (neutralizing the debt). So, $100 debt reduction at 10% is the same as $100 invested at 10%.

The secret revealed: How to guarantee a 25% return

Most of the people who ask me these questions are looking for ways to escape their debt and to become financially free. Most of the people, when asked, have a credit card, and at least one of the credit cards has a balance with a 25% (or higher) interest rate!

Still, these people are looking for ways to invest their money.

No matter what investment path you choose, there will be risk. Returns on investment are not guaranteed, but what is guaranteed is that you will pay 25% on that 25% APR credit card balance.

So, the safest and smartest use of your money while you have credit card debt is to “invest” it into the cards with the highest APRs. That is a guaranteed return on your money.

What I do every year

I am not debt free (yet). Every year, I list my credit cards, balances, and APRs. I sort the list from highest APR to lowest APR. I then budget for minimum payments to every card (because my credit score is important to me), and ALL EXCESS CASH goes toward the payment of the card with the highest rate.

This impact is compounding. When you faithfully dedicate all excess cash to your highest debt, then you systematically increase your available cash and guarantee immediate high returns on your investment.

For every $100 you pay down a 25% credit card, you save another $25 each year! Next year, you have $125 to pay toward that debt, which becomes $156.25, then $195.31, and so on. It snow balls.

Each year, you are able to pay down 25% more debt than you did the year before, because you have freed up that much more cash.

Eventually, you run out of debt on the 25% cards, and you can start paying down the 20% cards. Then you can move to the 14% cards, and so on.

I do not advocate a debt free existence

I do recommend paying down high interest debts before investing your money. However, there is a point where this no longer makes sense. Returns are not guaranteed on the open market, but there are varying rates of return that are “near certain.”

For example, you can get a 4.5% ROI on low-risk mutual funds. If you can borrow money at 2% and invest it at 4.5%, do it! That is a small return, but it is a return on someone else’s money.

If you can borrow money at 4% and invest it at 10%, do it!

The limit at which you stop paying down your debt balances depends on what your most predictable and reliable investment income is.

For me, real estate provides a predictable steady income at 20% or more, but the cash flow is low, which means that there are moments of high risk that make these investments hard to maintain if you don’t have stable finances.

For that reason, my limit is 10%. I insist on paying down all debts over 10% APR. Below 10% the question is one of urgency: Do I have an investment right now that will get me a higher yield? If no, the money goes toward the lower-interest debt. If yes, the money goes to the investment.

Do you get it?

In Summary

In sum, if you are looking for a guaranteed return on your money, the best place to start is with your existing debts. Rank them by APR. Pay off higher APR debts first. And make yourself a promise that whatever money you save using this method will be used only for paying down more debts.

Don’t use the money you saved to buy a nice dinner. Don’t use it to go on vacation, repurpose it toward the reduction of debts, and you will guarantee yourself huge returns in the process.