Where to Invest $5K (Hint: It's Not What You're Expecting)

by Dr. Steve Sjuggerud

Where to Invest $5K (Hint: It's Not What You're Expecting)

By Dr. Steve Sjuggerud, Advisory Panelist, Investment U

Monday, January 6, 2003: Issue #202

"Steve, where would you put an extra $5,000 right now?"

I get this question all the time. And as an added bonus, I usually get a detailed story of where the extra $5K came from: an inheritance, a bonus at work, etc.

Regardless of where it came from, my answer today will be the same. It's an important answer one that - when you truly understand it - can help you earn significantly higher returns in the long run. But the answer to where to invest $5K now is probably not what you're expecting

"Psst, here's what to do, but don't tell anyone put the whole lot on shares of Amalgamated Consolidated, and take profits one month from today"

If that's what you were expecting, I'm sorry to disappoint you. You won't hear that from me. I won't tell you to take the money and buy stocks, bonds or mutual funds. Can you believe it?

Why? It's simple. It's because I believethe cost of money may significantly exceed the return on money for the next few years.

When you think about this sentence, and understand it, you'll already know the advice I'm about to give.

What Kinds of Returns Can You Expect? And What Is the "Cost" of Money?

Think about the cost of money right now

Right now, the average interest rate on a credit card in America is about 13.5%. And interest rates - both on homes and new cars - are at around 6%. That's the COST of money.

Meanwhile, let's consider the return on money right now

The bank is paying basically nothing on your deposits. A 1-year CD at the bank will pay you 2%. You'll get only 3% if you're willing to tie your money up for 5 years in a U.S. Treasury bond. You can't earn any interest anywhere.

Meanwhile stocks (which pay less than 2% in dividends) are extraordinarily expensive, and are likely not a good deal.

So the cost of money is 13.5%, 6%, and 6%. The return on money is nothing, 2%, and 3%. And stocks are quite likely a bad deal.

Faced with these facts, what do you do?

Where To Invest $5K Now: The Smartest Thing You Can Do Today

The answer is easy you reduce your debts. It's not smart to pay 13.5% on one hand to earn 2% on the other. Yet this is what many people are doing today.

The average household in the U.S. has $8,367 in credit card debt (according to CardWeb.com). At 13.5% in interest, that'd be over $1,100 in interest due over the course of a year.

Why would you possibly consider investing your $5,000 (and likely earn 2%, or $100)?

You may feel good that you have an extra $5K in the bank. But the reality is, at the end of the year, you're $900+ worse off, because the cost of money exceeded your return on that money.

If you've got an extra $5,000 (or $100,000, or $10,000) that you don't know what to do with, now you know. Don't have it sitting around. It's literally costing you money.

Especially if you are heavily indebted (which some define as having mortgage expenses that exceed 28% of pre-tax income, total debts in excess of 36% of pre-tax income), now is absolutely the time not to invest, but instead use any extra funds to pay down debts.

As an advisory panelist of Investment U, you may think that it's strange for me to say "Don't Invest." But in a way, that's exactly what I'm saying. My advice for those searching where to invest $5,000 now is this: All you need to understand is that the cost of money may exceed the return on money in the near future so act accordingly.

Good investing,

Steve

Today's Investment U Crib Sheet

  • Now I realize that everyone's financial situation is different. But the truth is that many investors simply don't consider their debt when making investment decisions. If you're like the average household, with over $8,000 in credit card debts at 13.5% interest, your best use of a surprise $10,000 may be to pay off your credit card. After all finding a 13.5% winner in the stock market today is not an easy thing to do.
  • For a good source of information on credit card rates, bank rates, and getting the best deal on your COST of money, check out this nice independent website: www.bankrate.com.

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