It’s no joke – there are few investment choices in today’s economy that offer any significant return without taking on significant risks. As an example, interest rates on 5-year certificates of deposit are below 2%. Interest on your checking account? Forget it. The stock market is volatile and fails to show a consistent near-term pattern. Real estate values are down – often an opportune time to buy – but unless you have significant cash, banks are very strict on their mortgage lending criteria. So where to go?
If you modify your definition of “investment” slightly, there are still a few places to put your money and achieve a reasonable return with relative safety. Consider the following:
- Pay Down Mortgage Debt. If you are less than halfway through the term of the mortgage on your house, you are still paying a lot of interest to your mortgage lender each month. It is likely that more than half of your payment goes to interest and does not reduce your principal balance. If the interest rate on your mortgage is 5%, every extra dollar that you pay against principal is like investing that dollar at 5%. So if you pay down your mortgage balance by $50,000, for example, it is similar to investing $50,000 at a 5% return. (Because of the potential deductibility of interest on a first mortgage, there may be a tax benefit to paying deductible interest which would reduce the return somewhat, but the value of your investment in paying down your mortgage would still far exceed available returns in the money markets.)
- Eliminate Credit Card Debt. We cannot stress this enough. Credit card lenders are currently making a fortune on the spread between their ridiculously high interest rates and the actual cost of money. While their borrowing costs have gone down to almost nothing, few have reduced their rates much in the past few years. If you are carrying a credit card balance you should eliminate it if you have the cash to do so. Your “return” on your investment will be equal to the interest rate being charged by your credit card lender. This is a good “investment.”
- Invest in your Home. We often forget that the house that we live in has a “use” value in addition to its investment value. There are not many investments that you get to enjoy during your time of ownership. (Did you ever try to hide from the rain inside a certificate of deposit?) There are certain improvements that you can make to your home which enhance its long-term resale value and provide years of enjoyment in the interim. Some of the home improvements which offer the best investment value include replacing old windows and doors with energy efficient windows and doors, kitchen modernization and adding or upgrading bath facilities. On the other hand, adding a home office or a pool offers a relatively low return on your investment. You can learn more by searching “Home Improvement Investment Return” on the Internet.
- Focus on Necessities. If you are tempted to look at the equity markets for investment opportunities it seems that companies which produce or distribute things that people need and use every day fare better in an uncertain economy. People use toothpaste, diapers, paper towels, canned goods and kitchen staples in good times and bad times. Manufacturers of luxury goods and discretionary purchases seem to fare less well. Talk to a trained investment advisor if equities interest you.
- Go on a Trip! Seriously – if you are sitting on the sidelines with cash and nowhere to invest it, it might be a good time to take a special trip to that country that you have been wanting to visit. The dollar is currently stronger against the Euro and other currencies and you can view a special trip as an educational experience – an investment in yourself. Special memories last a lifetime. Bon Voyage!
— Kevin Palmer