This week: A reader wants to dive into the stock market and clean up. But is he making a mess?
Question: The stock market is going crazy since Trump got elected! When I was first out of college, there was the big stock market boom of the late ’90s, and I missed it because I didn’t get involved. I told my wife I want to take our savings, about $7,500, and invest in the hottest stocks.
She thinks this is a terrible idea because we still owe just over $2,500 on our credit cards. But I’m thinking we can make a lot more in the markets, then use the profits to pay off our debts. She won’t budge till she hears from an expert. You say you’re an expert. So let’s see what you got.
— Joe in Maine
Howard Dvorkin CPA answers…
I can’t tell you how much this idea scares me, but I’ll try.
First: if you’re carrying $2,500 in credit card balances, you should pay that off immediately if you have the means. It sounds as if you do.
Why do this? Because the average credit card interest rate is just under 16 percent. If you have your $7,500 stashed in a savings account, you’re likely earning around 1 percent right now. So paying off those balances is akin to saving 15 percent on your money.
Second: Even if you do well in the stock market, you won’t catch up to your credit card balances. From 1950 to 2009, the stock market has averaged 7 percent annual returns. That’s a number most market watchers know by heart.
Let’s say, however, you’re twice as smart as the market. Your stock picks return 14 percent. Meanwhile, your credit card balances are growing at around 16 percent. This doesn’t even take into account capital gains taxes, which can cost you 15 to 20 percent, depending on your tax bracket.
So the math doesn’t add up.
Notice I haven’t even mentioned the risk involved here. There’s certainly a time to buy stocks, but that’s not until the rest of your financial house is in order. I understand the allure of quick cash. Sadly, that’s often the quickest way to lose cash. I’ve been a CPA and financial educator for more than two decades, and I’ve yet to discover a “quick and easy” way to make money. The best ways are slow and steady, and the quick ways require considerable expertise and even some luck.
I urge you, Joe, to consider how much you can profit simply by eliminating debt. Then you can take a deep breath, do your research, and learn how to best invest your money. For starters, you want to build an emergency fund of at least a couple months of living expenses. You also want to start saving for retirement if you haven’t already. Even if you have, you want to add more, because very few of us realize just how much we need for golden years.
You sound like an ambitious and conscientious man, Joe. You have more money in the bank than you owe, so you’re on your way to financial freedom. Just don’t put that freedom at risk for no good reason.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.
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Article last modified on October 5, 2018 Published by Debt.com, LLC .