TRANSCRIPT

The other day one of my children asked me to recommend a safe place to invest her money.

She's concerned about the economy, and her mutual funds have been taking a beating.

What should she do?

Don't invest at all, I said. Pay off your debts, instead.

She looked at me rather strangely. After all, my business is providing investment advice. But I was dead serious.

With interest rates so low, so-called safe investments aren't really safe at all. Think about it this way.

Suppose you put your money into a term deposit or a high interest savings account that's paying 3%. It's not a lot, but it doesn't seem too bad these days.

But that 3% is before tax. So let's say you have to fork over a third of your profit to the government. That only leaves you with 2%.

Now consider inflation. It's been running at more than 2% over the past year.

But even if it falls back to 2% going forward, that still leaves you with a real return of absolutely zero. Nada.

On the other hand, if you pay down debt, it's like earning the after-tax equivalent of whatever interest rate you're paying.

On some credit card balances, that could be in the 15-20% range. Where are you going to find a safe investment that pays anything close to that? You're not.

So sit down and make a list of what you owe. First priority is to pay off any non-tax-deductible debt - start with whatever charges the highest interest rate and work from there.

Take my word for it - you can't make a better investment.

I'm Gordon Pape