Q: Where can I find an investment opportunity in which I’m guaranteed a big return?
A: You probably remember the first time you learned you can’t get something for nothing. For me, this lesson was courtesy of Columbia House, which promised free music but resulted in automatic enrollment in an obscenely expensive monthly CD subscription.
If someone promises you a big and guaranteed return, he or she is probably a salesperson and/or in dire need of your money; either way, you are unlikely to get it back. But there are two exceptions.
First, a 401(k) match is a guaranteed return.
I have written this roughly 400 times, but I will never write it enough: If your employer offers to match your 401(k) contributions, take the deal. Not only is it free money — a prize for saving for retirement, something you should be doing anyway — it is a huge, guaranteed return on your investment … a return one in four employees is missing out on.
Let’s say your company matches 50 percent of your contributions up to 6 percent, and you earn $40,000. That means if you contribute $2,400 this year, the company will throw in $1,200 — and just like that, you’ve earned a 50 percent return.
Now, if you invest that money — as you should — you could lose some of it to market fluctuations, at least in the short term. But you could also gain a great deal, particularly over the long term: Depending on how you’re invested, an annual average return of 6 percent to 7 percent isn’t unreasonable.
Paying off debt is a guaranteed return, too. This isn’t a traditional investment, no. But if you’re already earning your 401(k) match, or you’re not offered one, paying off debt can be the next best thing.
Wiping out a debt in one chunk rather than over time gives you a guaranteed return equal to the interest rate on that debt. In other words, paying off an 18 percent credit card interest rate equals an 18 percent return. That’s the money you saved by not paying that interest.
While that equation is true of most debt, this advice specifically applies to high-interest-rate debt — things like credit cards, some personal loans and most definitely payday loans. These tend to have interest rates that exceed what you could earn through investing.
Finally, to make your money really go far, you can put the debt payments you no longer owe toward your retirement instead, either in that 401(k) or in an IRA.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website.