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LOUISE FAIRSAVE: Guaranteed rate of return

BEA DOTTIN, [email protected]

LOUISE FAIRSAVE: Guaranteed rate of return

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Today, we continue exploring investing and its many facets. I am pleased to introduce you, my readers, to a guaranteed rate of return which will typically well exceed ten per cent.
Already you are thinking that this is impossible. How could someone, learning about investing from scratch, have such a grand incentive? This just had to be a hoax. On the contrary, this investment strategy is failure proof; it is risk free.
Let me share with you that revelation: the proposed investment is rather simple and quite profound – all you have to do is pay off your debts. However, as I try to encourage more people to control their personal finances and to get more and more investment experience, this is a fundamental lesson. It can even be a stronger lesson for some experienced investors.
One of the very first steps for a new investor is to get rid of personal debt. Even before you start saving towards making your first lump sum investment, your priority must be to pay off all consumer debt. It just cannot make sense saving and getting a two or three per cent return on your savings while paying 18 to 33 per cent on consumer debt.
I liken the saving/investment process to putting petrol in your car, starting the engine and moving forward. I liken incurring consumer debt to hiring a tow truck to pull the car backward by attaching it to the rear fender while pressing the accelerator and trying to inch forward. 
The extent to which you do get around to investing your savings and making a return higher than the saving rate is likened to the extent to which, when you press on the accelerator, the car moves forward. The higher the investment return, the more forceful and further your car moves ahead.
On the other hand, the extent to which you incur consumer debt is the extent to which your car is towed backwards. The more debt you have, the more likely and forcefully the car will reverse. To start to invest without getting rid of that cumbersome consumer debt is like wasting gas in revving a car that is being pulled backwards and ends up going nowhere.
The sensible driver would get out of the car and place all resources on getting rid of this back-breaking burden. Only when the car is free of this encumbrance would he then get into the car, start it and press on the accelerator.
That is the most vivid word picture that describes that initial investment process.
All investors, new or seasoned, should avoid consumer debt. Consumer debt can break the back of whatever investment strategy you devise. The worst yet perennial consumer debt is the credit card. Credit cards are one of the easiest spending tools to get and one of the hardest to decide to get rid of. People may even start out with the best of intentions, yet end up utilizing the high-cost credit facility.
Other consumer debt includes in-store credit cards and consumer loans taken from commercial banks or other financing institutions. Any time credit is used to finance pleasures such as overseas trips, cars, furniture and other household equipment, clothing, and food, the purchaser is accessing consumer credit.
To pretend that one is investing while being laden (secretly or overtly) with consumer debt is to fool mainly oneself. Instead of helping your lender to earn 18 or more per cent on his funds invested, you should pay off those kinds of debts and effectively save/earn that level of return for yourself.
• Louise Fairsave is a personal financial management advisor providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.