| No, this is not some futures or commodities trading | | | | 2% of it and inflation can take another 3%, leaving |
| strategy. You don't have to join a cult or an MLM. | | | | you with only 6%, which is less than your mortgage. |
| And you can do this for years. | | | | And that's assuming you actually get the 11% return |
| The only qualification is that you have a mortgage or | | | | that year. Also remember that years in which high |
| home equity loan. | | | | returns in stocks are enjoyed are also often |
| You can achieve more than 100% returns on your | | | | accompanied by higher than normal inflation rates. |
| money simply by paying extra money on your | | | | But some people will not be persuaded and will insist |
| mortgage each month or as often as you like. | | | | on investing in the stock market before paying off |
| Here's how it works: If you have a 30 year | | | | their mortgage and that is understandable. We all |
| mortgage at 7%, for each $100 of your loan amount | | | | want to build some sort of retirement nest egg or |
| you will end up paying as much as $209 in interest. | | | | have an emergency fund that is growing by more |
| So within the 30 years of paying off your mortgage, | | | | than the dismal rates offered by bank savings |
| you will repay that $100 that you borrowed PLUS | | | | accounts or money market accounts. |
| you will pay up to an additional $209 in interest. | | | | But if paying down your mortgage makes sense at |
| So if you "invest" an extra $100 along with your first | | | | 7%, how much more sense does paying down your |
| mortgage payment, you will end up saving $209.42. | | | | higher interest rate debts. If you have a credit card |
| That's a return on your "investment" of 109%! And | | | | charging you as much as 24%, it makes way more |
| it's guaranteed. | | | | sense to pay this off before investing any money in |
| Plus you have just lowered the amount you are in | | | | the stock market. |
| debt and reduced the time it will take for you to pay | | | | Some people would argue that it is good to invest |
| off your mortgage. How many cold-calling investment | | | | always even if you have debt. But that is contrary to |
| brokers can offer you a deal like that? | | | | the overall goal of increasing your assets and wealth. |
| So you could look at it as investing the $100 in your | | | | For example, let's say you owe $1058 on a 24% |
| mortgage means that there is $309.42 you won't | | | | credit card and you have an extra $100 each month. |
| have to pay out in the future. You could even argue | | | | You decide to make your minimum payments while |
| that this is a return of 209%. | | | | investing the rest into the stock market. |
| But what if you are several years into your | | | | If your stock market investment gives you a 12% |
| mortgage. Well, even if you are 10 years into your | | | | rate of return you will have about $996 at the end |
| mortgage (and the average mortgage only lasts | | | | of the year ($100 - min pmt x 12 months + |
| about 7 years these days), you can still save $139.42 | | | | "interest"). But you will still owe $1079 (more than |
| in interest by paying an extra $100. Or if you are 20 | | | | you started with) on your credit card. |
| years into your mortgage you will still save $69.42 by | | | | Viewed another way; you paid a total of $1200. |
| paying an extra $100. | | | | Adding together the negative credit card balance and |
| So what have you got to lose but your mortgage | | | | the positive investment value gives you have a net |
| debt? | | | | value of $-83. |
| So why don't more people do this? | | | | Instead, if you use the full $100 to pay off your |
| Probably because the conventional "wisdom" says | | | | debt, you will be debt free at the end of the year. |
| that if you can earn a better rate with an investment | | | | You won't have an investment but overall you will |
| than what you are paying on your mortgage you | | | | not still be negative. The next year, you could invest |
| should invest instead. If you are paying 7% on your | | | | the full $100 into the stock market. But if you still had |
| mortgage and you can earn 11% in the stock | | | | your debt, you could only invest $78.50 while still |
| market, it seems a no-brainer that you should invest | | | | making your minimum credit card payment ($100 - |
| in the stock market. | | | | min pmt: $21.50 = $78.50). |
| There are two problems with this philosophy: first, | | | | Now if you take this scenario and play it out over 5, |
| the 11% stock market figure that is widely quoted is | | | | 10, 15 even 20 years you can see how paying your |
| an average over the past 30 years. Returns in the | | | | debts off now can save you $1000s in interest and |
| stock market have averaged on a yearly basis both | | | | help you pay off your debts sooner. Once your |
| higher and lower than the 11% rate. How do you | | | | debts are paid off you can use ALL of the extra |
| know when you are investing in a year with negative | | | | money to invest. |
| returns? Unless you are in the financial industry you | | | | Numerically it is much better to pay off your debts |
| are probably taking as big a gamble as you would in | | | | first. But since your stockbroker makes his money |
| Las Vegas playing the Roulette Wheel. | | | | off your investing what do you think his advice will |
| The other problem is that both inflation and taxes will | | | | be? |
| eat away at your 11% return. Taxes can eat up to | | | | |