If someone could guarantee you a return on investment of 12.77%, would you take it? You’d be suspicious, right? Your objections would be manifold:
- “This must be some unscrupulous, fly-by-night, hedge fund or offshore charlatan trying to get me to invest. They target us expats all the time.” No, nothing shady here.
- “Perhaps it is some sort of high-risk investment in interplanetary travel that could pay off 12.77% but would more likely wipe out my savings.” No, nothing speculative either.
- “12.77% guaranteed? I’ll bet there is some trick or escape clause in that guarantee.” No, no legalese or loopholes.
- “That money has to come from somewhere, so there must be high fees.” No, no fees either.
- “It’s got to be locking our money up into CDs or treasury notes for 30 or 40 years, right?” No, you can earn this tomorrow.
- “So it must only be for qualified investors who can put millions or billions into this?” No, in fact, it is in your best interest to earn this 12.77% on as little money as possible.
Have you figured it out yet?
Perhaps the best financial move you can make and probably the highest guaranteed return you will ever see will come from…
Paying Off Your Credit Card Debt
This seems like such a no-brainer that everyone would do it, but that is simply not the case. There are plenty of expats with ten thousand dollars in their low-interest savings account who carry a few thousand dollars of debt every month. Some investing-minded people are maxing out their 401k, contributing over $1,500 per month (which is a great idea if you can do it!) but not paying off their $1,500 credit card balance at the end of the month (which is generally a terrible idea!).
There are plenty of other crazy abuses of the simple math involved here. Someone might make extra payments on their 4% mortgage but not pay off their 10% credit card. A speculative investor might decide that stocks are going to make a move so they forgo paying off their 15% card in order to slip a few thousand more dollars in the stock market. Paul Merriman says, looking at 20-year spans in the S&P 500 from 1934 until 2015, “The average return of the 61 20-year periods was 11.6%.” One of those spans actually gained 17.9% but another only gained 6.5%. A sure 12.77% beats a 20-year hope any day, and in a single year, the S&P 500 could rob you blind!
Paying off high-interest consumer debt is generally the first step toward financial independence. According to research done by Credit Donkey, the average credit card interest rate as of August 2017 was, you guessed it, 12.77%. If you are using a foreign credit card, your mileage may vary, but 12.77% seems more than fair. If you think you can beat that rate by playing the stock market, paying down your house, opening a CD, or almost anything else imaginable, you need to review some basic math concepts.
Andrew Hallam points out that “Paying off an 18% interest bearing loan provides a tax free gain of 18%.” Those two words, “tax” and “free” sound really nice together, don’t they? Hallam goes on to cite some research indicating that:
you might need to gain 25% on your money in the stock market to equate to the after tax gain that paying off an 18% interest bearing credit card balance would provide.
The One Exception
Perhaps the only way to earn a better return on a buck is if your employer has a generous matching contribution to your 403b or 401k program. Count yourself truly blessed if you are one of the very few teachers, non-profit workers, or other US expat employees (who is not earning six or seven figures!) who receives matching funds. If your employer does offer a match of 25, 50, or even 100% on the first, say, $200 per month that you put into your retirement account, well, you probably don’t want to ever miss that match.
We’d recommend investing in your retirement account up to the amount of the match (giving you a guaranteed return of 25, 50, or even 100%!) and then immediately throwing every other spare penny, Euro-cent, or peso at your credit card debt.
Like a Bear to the Beehive
Whether you need to supplement your income, cut your spending, reduce your cash reserves, or just work on your math skills a little, it is time to realize that 12.77% is not a gain you want to pass up.
As limited-income US expats, we can’t afford to make mistakes with our money. Debt can send us home when we least want to go. Remember the incredible determination it took us to move abroad in the first place? We’re going to need that same incredible determination now to pay off our consumer debts.
Like a bear to the beehive, we have to be utterly, courageously, and ridiculously determined to reach this goal. We may need to climb a few trees and face the wrath of swarming bees. However, there is a honey-filled beehive at the end of our journey. The bear wants mere honey, but we Vagabonds crave that sweet, sticky, tasty nectar called Financial Freedom.
It may sting a bit, but the beehive is within our reach, and our journey begins by gaining a sweet 12.77% returns by paying off our credit card debt!