Live Debt Free

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High Return Investments for Low Income People

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Betterment is now offering a $25 bonus for all new accounts. There are no minimum balance requirements to sign up and no transaction fees.

High return investment advice

Olivia asked:

Greetings Matt,

Do you know of any investment return situations for lower income people? The best out there for our situation seems to be ShareBuilder, or CDs. The idea of a “side hustle” has crossed my mind as well, like selling on eBay, or writing more extensively. Doing daycare, heavy lifting, anything that ties up the car, etc. are not options. Thanks for putting your mind to this.

Regards, Olivia

If you have debt…

The easiest way to make a high return on your investments is to pay off debt.  If you have high interest debt, focus on paying that off.  When you pay off debt you continually lower the principal value of that debt thus reducing how much your debt costs you each month.  I currently choose debt reduction over investing because I earn more by reducing debt.  When that debt is gone I will shift my focus to building my Emergency Fund and investing in low-cost index funds.

If you have NO debt…

  1. Build a 3 – 6 month Emergency Fund using a high yield savings account by funding it with automatic monthly contributions.  I prefer Capital One 360 as a bank.  You could also go with CDs but then you sacrifice the liquidity of your funds for no added benefit – at the time of writing CD rates are comparable to high yield savings accounts.
  2. If you already have your Emergency Fund in place consider peer-to-peer lending and invest with Lending Club. or Peer to peer lending is one of the most sound investment advice I can give would be
  3. Another wise choice is to focus your efforts on long-term, buy & hold investing using low cost index funds or ETFs.  With income limitations, a wise choice is to invest with Betterment.  Betterment is one of the easiest, most effective ways for the layman to invest in index ETFs, which is really the best investment I know of… and they’re currently offering a $25 bonus for all new accounts, so it’s a great time to check them out.

$25 Betterment Account Bonus

Betterment is now offering a $25 bonus for all new accounts. There are no minimum balance requirements to sign up and no transaction fees.

Save for Emergencies, invest in peer-to-peer loans, and focus on index funds and ETFs.

One of your biggest allies to saving and investing is automatic deposits and automatic rebalancing… which is another reason I suggest you invest with Betterment.  They allow you to set up regular automated contributions, make it easy to determine your risk profile and diversify accordingly, and automatically rebalance your portfolio for you, all for a fee lower then any financial planner will offer.  Good stuff.

Regardless of debt amounts…

You mention starting a “side hustle” – I would recommend you follow through on this.  Making money from a blog is possible, but not easy.  It’s very time consuming and is usually slow to show returns.  Unless you can afford to work for approximately 6 months with no return, then a monetized blog may not be your most lucrative route.

Make sure you choose a business idea you are passionate about.  Life is too short to spend our time doing things we do not like for money.

In Summary…

  1. Pay down debt.
  2. Build your Emergency Fund in a high yield savings account.
  3. Invest in peer-to-peer lending with Lending Club.
  4. Invest in index ETFs with Betterment – automation is your best friend.
  5. Start your own side business you’re passionate about.
If you need debt help or personal finance advice – Ask Matt Jabs.

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We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/advisor relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Debt Repayment Advice for Stacy

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Best way to pay off debt?

DFA reader Stacy asked:

Dear Matt, I have been in military service for 20 years. I will be retiring in about 14 months. Unfortunately I haven’t been the wisest money manager. I Have:

  • $69,986 Mortgage @ 5.5% with a minimum payment of $541
  • $16,954 Car loan @ 18% with minimum payment of $614
  • $5833 Credit card @ 9.9% minimum payment of $200
  • $5100 Student loan @ 2.47% variable with minimum payment $60

By cutting back on unneeded expenses I will have an extra $600.Should I work towards paying the higher interest rate off first? Or work from lowest to highest? Also, I will only have this extra money for 14 months. I am working to get as debt free as possible before retirement. Your assistance is greatly appreciated.

How I would pay off the debt

Hi Stacy, thank you for your question and thank you for your service.

If it were me I would sell the car, pay off the auto loan, and buy a used vehicle for around $3,000 – right now you’re paying more for your car than your home.  If you’re unwilling to do that then focusing your debt snowball on the auto loan first is a must.  It will give you the biggest bang for your buck because it has the highest interest rate.  Since you will have the extra $600 for the next 14 months, you should be able to pay the auto loan off by around August or September of 2012.

After your auto loan is paid off, you will no longer have the extra $600 but you will have freed up the $614 that used to go toward your car payment.  Next put that extra $614 toward your credit card.  Once you pay off the credit card debt you will have $814 extra to put toward your student loan.  Some may advise you to put it toward the mortgage before the student loan, but don’t.  Your home is your asset against your mortgage… you have no asset against your student loan, plus it is a variable rate loan, so pay that off next.  After you pay your student loan off you can focus all efforts on eliminating your mortgage.

Student loan forgiveness for military personnel

Since you are in full-time military service you may qualify for student loan forgiveness… have you ever checked into that?  Follow this link for more information and to find the necessary forms to apply for loan forgiveness.

Budget your money and save

I always make it a point to make sure people are budgeting and saving money.  Do you have a working monthly budget?  If not, you need one.  You can either use my budget worksheet or a budgeting software program – I recommend You Need A Budget.

Are you saving money and do you have a savings buffer currently in place?  If not, start saving.  Build up at least a $1,000 emergency fund to help you avoid using your credit card.  If you don’t have money for emergencies – and emergencies will come – then you’ll never break the cycle of credit card spending.

Thanks again for your service Stacy… and congratulations on taking steps to pay off debt and better manage your money.  If you follow this advice you will have success.  God bless.

Debt Advice – Debt Payment Order Question

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Debt payment order for Nathaline

DFA Reader Nathaline wrote:

I am currently in debt with a car loan and a student loan. The interest on the car loan is 4.99% and the student loan rate is 5.25%.

Student loan:
I started repayment for the student loan in July 2008, with a starting balance of $22,565. In 2010 I consolidated my student loans with a new balance of $18,174. The current balance is $17,147. The minimum student loan payment is currently $149 – I pay an extra $50 to $100 each month depending on what is happening in my life.

The auto loan:
I financed the car loan in August 2010 for $17,477. With an interest rate of 4.99%, my minimum payment is $330. The current balance of the auto loan is $15,656.

My big question:
I have an extra $200 in my monthly budget to make extra payments, so where should my focus be? Should I direct $530 (330 +200) to the car loan or $349 (149+200) toward the student loan?

Pay off debt like this…

Hi Nathaline – congrats on having an extra $200 each month to put toward debt.

Normally I always advise paying the highest interest debt off first.  Let’s do the math to see if that position works best for this situation.

Nathaline has a total of $679 to put toward debt each month.  There is only a 0.26% difference in interest rates between the two debts, but the difference in minimum payment amounts is large – but does that make a difference?  Let’s do the math for each scenario.

These calculations are based on a consistent $679/month ($200 extra) debt repayment.

Student loan then auto loan

  • $149 + 200 = $349 toward the student loan
  • $330 toward the auto loan
  • Total weeks to pay off debt = 55 (auto loan in 53 weeks and student loan two weeks later in week 55)
  • Total interest paid = $4,018.06

Using this approach both loans will be repaid in 55 weeks.  The auto loan will still be repaid first – in week 53 – since the minimum payment is so much higher… but the student loan will be repaid only 2 weeks later in week 55.

Auto loan then student loan

  • $330 + 200 = 530 toward the auto loan
  • $149 toward the student loan, until auto loan is paid off at which point all $679 will go toward the student loan
  • Total weeks to pay off debt = 55 (auto loan in 32 weeks and student loan in week 55)
  • Total interest paid = $4,061.01

As you can see, there is little difference to paying one loan off before the other.  Both approaches will pay off debt in 55 weeks, but there is a small savings to be had.

The answer

If the $200 is put toward the student loan first Nathaline will save approximately $43 in interest costs over the life of both loans.  Although the difference is small, every penny counts.  That said, if Nathaline would benefit from seeing one loan paid off sooner, then she should focus the extra $200 on the auto loan first.  This will allow her to pay off the auto loan in just 3 years giving her a feeling of victory.

What do you think Nathaline… would you rather save $43 and take 53 weeks to pay off the first loan, or eat the $43 and have the first debt repaid in just 32 weeks?

What would you do?