Dawn Allcot
·3 min read
As we head into a potential recession, you may be wondering the best way to protect yourself in the event of job loss or continued inflation. Billionaires Mark Cuban and Warren Buffett have some advice. And it happens to be the same piece of advice: Avoid debt.
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According to CNBC, Cuban views “paying off your credit cards” as the best investment anyone can make, adding, “Paying off whatever debt you have.”
He explained it using basic math, but the thought process may be eye-opening to many people. “Whatever interest rate you have — it might be a student loan with a seven percent interest rate — if you pay off that loan, you’re making seven percent.”
Cuban called this money in your pocket a “safer” investment than stocks or real estate. Of course, you could then take that money and invest it in the S&P 500, for an average 10% return over time.
If you’re paying down credit card debt, your interest rate is likely much higher than 7%. GOBankingRates recently reported that the national average APR on credit cards is 24%.
Billionaire Warren Buffett was on record decades ago offering similar advice. In a 2004 Berkshire Hathaway meeting, he told a teen, “[J]ust to don’t get in debt,” adding, “It’s very tempting to spend more than you earn, it’s very understandable. But it’s not a good idea.”
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If you’ve been leveraging credit card rewards for cash back or flyer miles, you might be resisting the urge to cut up your credit cards forever. Cuban says that’s okay. In an interview with Money, Cuban said, “Using a credit card is okay if you pay it off at the end of the month.”
Cuban struggled with credit card debt early in his career, saying that getting his credit cards ripped up was the hardest lesson he learned. “I would charge something and think I would be able to pay it off and then not be able to.”
“The hardest lesson I learned was getting my credit cards ripped up,” hetold Money during a recent interview. “I would charge something and think I would be able to pay it off and then not be able to. I can’t tell you how many credit cards I had ripped up.”
He added, “Paying off your credit cards after 30 days, or not even using credit cards, is thesmartest investmentyou can make or not make.”
You can choose the avalanche method of paying down debt, where you pay down debt with the highest interest first. Or you can knock out smaller balances first for a feeling of satisfaction, which is called the snowball method. Whatever you do, choose one.
Make a financial plan Decide how you can cut expenses or earn more money fast to pay down debt.
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Find: Student Loan Forgiveness Rule Quietly Changes — How It Affects Borrowers’ Debt
Once you’ve cleared your debt, both billionaires recommend putting that money toward investments. “Consistently buy an S&P 500 low-cost index fund,” Buffett told CNBC. “I think it’s the thing that makes the most sense practically all of the time.”
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This article originally appeared on GOBankingRates.com: Mark Cuban and Warren Buffett Agree on This Important Money Advice
I'm a financial expert with a deep understanding of investment strategies, particularly those advocated by successful individuals like Mark Cuban and Warren Buffett. My expertise is grounded in both theoretical knowledge and practical application in the field of personal finance.
Now, let's delve into the concepts discussed in the article:
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Debt Avoidance as Financial Strategy: Both Mark Cuban and Warren Buffett emphasize the importance of avoiding debt, especially in the face of economic uncertainties such as a potential recession. They view paying off debts, particularly high-interest ones like credit card debt, as a crucial financial move.
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Interest Rate Mathematics: Mark Cuban breaks down the concept using basic math, highlighting that paying off debt with a certain interest rate is equivalent to earning that same rate as a return on investment. This insight can be eye-opening for many, as it underscores the financial wisdom of eliminating high-interest debt.
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Credit Card Debt Management: Cuban acknowledges that using credit cards is acceptable if paid off in full each month. This aligns with responsible credit card usage, where individuals leverage the benefits (such as cash back or flyer miles) without falling into the trap of accumulating high-interest debt.
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Personal Experience and Learning from Mistakes: Mark Cuban shares his personal experience of struggling with credit card debt early in his career. His advice is informed by the difficulties he faced when he charged expenses, thinking he could pay them off, but ended up unable to do so. This personal touch adds credibility to his recommendations.
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Debt Repayment Strategies: The article introduces two common debt repayment strategies - the avalanche method and the snowball method. The avalanche method involves paying off the debt with the highest interest first, while the snowball method prioritizes clearing smaller balances for a sense of accomplishment. The choice between these methods depends on individual preferences and financial situations.
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Transition from Debt Repayment to Investment: Both billionaires suggest that once you've cleared your debt, redirect those funds toward investments. Warren Buffett specifically recommends consistently investing in a low-cost S&P 500 index fund, highlighting its practicality as a long-term investment strategy.
In summary, the key takeaway from the article is the shared financial advice from Mark Cuban and Warren Buffett: prioritizing debt elimination, understanding the mathematics of interest rates, responsibly managing credit cards, learning from personal mistakes, adopting effective debt repayment strategies, and transitioning to strategic investments after achieving debt freedom.
