How to Get 20% Returns

by Dual Income No Kids on September 3, 2008 · 0 comments

Hello All,

If you’re a reader of personal finance blogs, you’re probably wondering how to increase your wealth. There are many ways to go about doing this. One is to make your accounts more efficient, by increasing the amount of interest they pay or by improving your cash flow through reducing wasteful spending.

However, to build serious wealth you’ll want to maximize your returns. Generally speaking the higher the returns the better, but shooting for 20% is quite respectable. Here are some thoughts on how you can supercharge your situation to get 20%.

1) Pay off high interest credit card debt. An amazing amount of people carry credit card debt at 24% to 29%. One thing about interest is if you pay off a dollar of a debt carrying 24% interest, then its the same thing as an investment yielding that amount. So, if you pay off a bucks worth of debt that costs you 24 cents to carry, then you’ve saved 24 cents in costs – which for your budget is the same thing as an investment that brings in 24 cents for a dollar committed. Bottom line – pay off that high interest debt, you’ll get a high return.

2) Invest in Individual Stocks. This is a bit riskier than some other strategies, but if you can catch a hot stock on the upswing you could make 20% or more. Some examples of stocks previously seeing this kind of growth are Microsoft, Starbucks and Hansen’s Natural. In the case of these stocks, their value exploded well more than 20% on an annual basis. If you don’t have such a taste for risk, a position in high yielding blue chip stocks with strong earnings in some years can yield over 20%.

3) Make use of Tax Shelters & Employer Matching:

Everybody thinks you need to hit a home run with stocks to get 20%, but its just not true. If you contribute to a traditional IRA, the amount you contribute can improve your effective return via tax benefits. According to Dinkytown.net, if you put $2,000 into a traditional IRA, and are in 28% tax bracket making $50,000 then you’d save approximately $300 dollars in taxes. This means that your $2,000 contribution to a deductable IRA has already yielded a 15% effective profit, based on reduced tax liability. In the IRA, you’d only have to find an investment that would give you another 5% profit for a total yield of 20%. Hint: You can get that much by via low risk high quality corporate bonds.

Along the same line of thinking, if you max out your IRA, often your employer will match your contribution. Even a modest 401k program – perhaps one yielding 3% – will give you what is essentially free money. For a 3% match, this means that your 401k investments will only have to yield 17% rather than 20%. So, not counting the tax implications, getting matching funds for your retirement can help you to get to 20% annual returns.

3) Other Methods:

Some people argue that tax liens, discount mortgages, reverse convertible bonds, or other less well known investment options can provide superior returns. We DINKs know less about these methods and can’t attest to their effectiveness. However, we are more certain that paying off high interest debt, investing in individual stocks, maxing out IRAs and 401ks can help you get get 20% returns.

Best,

James & Miel

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DINKS (Dual Income No Kids) Finance focuses on personal finance for couples. While by no means financial experts, we strive to provide readers with new, innovative ways of thinking about finance. Sign up now to get our ebook, "Making Money Tips for Couples" FREE.

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