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% returns 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.
A great way to get 20% returns is to pay off your 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 it’s the same thing as an investment yielding that amount. So, if you pay off a buck’s worth of debt that costs you 24 cents to carry, then you’ve saved 24 cents in costs. For your budget, this 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 at least 20% returns.
2) Get 20% returns by investing 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% returns or more. Some examples of stocks previously seeing this kind of growth are Microsoft, Starbucks, and Hansen’s Natural (now Monster Energy). 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 blue chips 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 it’s 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 a 28% tax bracket making $50,000 then you’d save approximately $300 dollars in taxes. This means that your $2,000 contribution to a deductible 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 stock funds.
Along the same line of thinking, if you max out your IRA, often your employer will match your contribution. Even a modest 401(k) program – perhaps one yielding 3% – will give you what is essentially free money. For a 3% match, this means that your 401(k) 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.
4) 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 401(k)s can help you get get 20% returns.
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