Money: An investment that pays 20% per annum with no risk?
25 Jan 2019
By guest contributor, Jared Campbell
Between entertaining my children over the summer holidays, I managed to sit down with Mary Holm’s new book, Rich Enough? – A laid-back guide for every Kiwi
Mary writes for the Weekend Herald, speaks on a fortnightly slot on Radio NZ and is a well-known commentator on the New Zealand personal financial landscape. I have paraphrased one of her suggestions that resonated with me -
… It’s that time of year with many people returning to work, logging onto their internet banking and realising, Oops, I did it again and overspent on Christmas and the holidays”.
Have I got a deal for you! I know of an investment paying 20% per year! It’s easy and it’s no risk!
Hopefully you are getting ready to call my bluff. Investments paying 20% per year can’t be no risk. Risk and return are related, right. To get high returns, one needs to take high risk.
But wait ... this time it’s different!
Now you should be running for the hills. Those four words – this time it’s different, in my opinion, are the silliest words you will hear in describing any investment.
What Mary was talking about is paying off your credit card debt in full every month to avoid paying the 20% interest that they charge.
If you owe $1,000 on your credit card and make no payments, after a year you’ll owe $1,200. The next year it will be $1,440, then $1,728, then $2,074. The debt has more than doubled in four short years. After 9 years your $1,000 debt is $5,160, more than five times as big. This is how compounding interest works.
Levels of credit card debt are highest at this time of year. If you have over-spent on Christmas and holidays, then your number one priority should be to reduce that debt as quickly as possible. Make it your mission. Be prepared to sacrifice other priorities to do it. Don’t just pay off the minimum monthly payment. That’s just the bank trying to trick you. If you do only pay off the minimum each month, you’re in good company as one-in-three New Zealanders fall victim to this trick. In her book Mary even talks about pausing KiwiSaver contributions to reallocate those funds to reducing credit card debt! A big call, but it’s hard to argue with 20% rates working against you!
If you have high credit card debt, consider shifting your credit card to a rival bank. Only do this if they offer you an interest-free period. A quick google search shows BNZ are offering a 12-month interest free deal. I’m sure other banks have similar deals too. After all, lazy credit card users are very profitable customers for banks to have!
I’m not immune to spending on my credit card. I too have money owing from the holidays. But I will take my own advice, and Mary’s, and pinch some out of my savings to pay off my balance in full. After all, a true measure of wealth is the value of our assets, minus debts. My savings account earns a tiny 2.1% per year. It’s a no-brainer to take the 10x that return by paying off my credit card in full.
Read more articles in this fortnight's edition of 'News Farmers Can Use':