I’m betting that at least once since March, you’ve wondered whether there’s something smarter you can do with your life savings than leaving it on Wall Street’s roller-coaster. Maybe it was when the market was down more than 20% from its pre-COVID high? Or maybe it’s now, when even Paul Krugman warns, “Why are investors rushing to buy junk?”
Here’s a simple alternative: Borrow from your pension fund and invest in yourself instead. Consider these five investments, which typically pay better than Wall Street in good times—and certainly will now.
Paying Off Your Credit Cards
Interest rates on credit cards are currently averaging over 17%, which means millions of Americans are paying a usurious 25%-30% in interest each year. Overall, Americans carry nearly a trillion dollars of credit card debt, and cardholders average a balance over $6,300. If you’re paying 20% on a credit card, every dollar you deploy to reduce your credit card debt, instead of investing in the stock market, generates a return of 20%—guaranteed!
Investing in Your Kids’ Future
Being smart about credit card debt isn’t limited to the cards in your wallet. If your son or daughter has racked up an unsustainable credit card debt of $15,000, make a deal: “I’ll buy out your credit card, pay it off, and you can pay me the $15,000 at an interest rate of 5% per year.” Your son or daughter gets a new lease on life, and you get a great new income source. Consider doing this for your child’s student debt as well.
Investing in a Home
If you’re a renter, now is a great time to buy a home. As long as Uncle Sam continues to provide tax deductions for interest paid on the mortgage of your primary residence—one of the biggest subsidies the federal government offers—investing in your own home pays better than Wall Street, even if your property doesn’t appreciate a penny. For most Americans, home equity is the only wealth they’ll really accrue. Every dollar invested in a home usually translates to more than a dollar in avoided rent.
Paying Down Your Mortgage
If you’re already a homeowner with a mortgage, you’ll get a higher return if you use excess funds to pay down your mortgage more quickly. Again, the tax advantages of a home, even with a smaller mortgage, will beat your long-term gains from Wall Street. The faster you can avoid any housing expense, the easier your life will be in the long term.
Cutting Your Household Bills
If you look at your total household spending beyond housing, you’ll see plenty of opportunities to invest in yourself. One example is your utility bill. According to the 2016 annual Consumer Expenditure Survey, the typical “consumer unit” (which means, roughly, a family) spends $3,884 per year on utilities, which include gas, electricity, garbage pickup, and sewage. Can you get a higher rate of return through the purchase of efficiency measures and renewable energy devices than you would by investing conventionally on Wall Street? Absolutely. The American Council for an Energy-Efficient Economy reports that even “light” improvements in your home’s energy efficiency can deliver a “whopping 18.5% return annually.”
So, how can you do these things by borrowing from your pension fund?
Check with your plan. Some 401(k) plans allow you to borrow from your retirement funds—so make this the first place you check.
Turn to the CARES Act. The recent coronavirus federal stimulus package, or CARES Act, allows American families to take a short-term hardship withdrawal from their pension funds. You can do this if you’re adversely affected by a quarantine, layoff, reduced hours, or increased child care expenses. In short, just about every American qualifies. There are no penalties—you just have to pay yourself back in three years at a low-interest rate (your fund keeps the interest). You can borrow up to the lesser of 100% of your pension or $100,000.
Set up a Solo 401(k). If you dodged the COVID bullet and have some self-employment income, you can set up a Solo 401(k), but that income into the account tax-free, and then borrow up to $50,000 from it at a tiny interest rate. This loan could be over five years. If you’re not self-employed, sell a few items on eBay, report the income on Schedule C, set up the Solo 401(k), and rollover your other retirement savings when you resign or retire from your job.
Rethinking the Investment Industry
Most of us have been bamboozled by the investment industry to overlook obvious places where we can make, effectively, a 7%-30% rate of return each year. Skeptics will insist that this advice is not investment advice at all, but rather personal financial management. Nonsense. This is a distinction without a difference. Yes, in a perfect world, we all would run perfectly efficient lives, be debt-free, own our homes free and clear, and amass significant savings we could then invest in other businesses. Except for a small percentage of the American public, this is a cushy world that doesn’t exist.
Don’t pay attention to the industry’s absurd silos. The money is all coming from the same place—your pocket. When you have maximized your personal—and local—returns from this list, then, and only then, should you consider returning to the dangerously unpredictable stock market.