Post of the Day
February 24, 1998
Misc. Investing Strategies Board
Subject: Re: lump sum investing
[Here, the author is replying to a previous post]
> 1. pay off credit cards
Since most of these are at 12+ percent, absolutely.
> 2. pay off auto loans
Depends on the rate.
> 3. prepay your mortgage
Probably not a good idea.
Managing debt (negative money) should be looked at like managing investments (positive money). All other things being equal, would you keep your money in bank A at 5% if you could put it in bank B for 7%? I hope not.
On my home I have a 5 year balloon at 6% (no sense paying the higher rate for a 30 year loan if I plan to live there less than 5 years). Since I can write off 100% of the interest and I am in the 30+% tax bracket, this effectively lowers the rate to about 4%. So, with my extra $2,000 I can pay down my mortgage thus saving myself 4% or I can invest it at more than 4% and make a better profit.
Incidentally, those people who think that prepaying your mortgage lowers your interest don't really understand how interest works. All you are doing is increasing the amount of PRINCIPLE that you are paying with each monthly payment. The amount of interest on the BALANCE remains the same.
Here's the number one rule for getting rich:
Live well below your means.
When the bank (and your real estate agent) tells you that you can afford a $200,000 house, they mean that by you putting as much of your disposable income into a mortgage payment as possible, they make the most money. Same goes for car payments.
I can afford a Lexus but drive a T-Bird.
I can afford a $200,000 house but I live in a $70,000 house. Since I live in a relatively lower cost area (Ft. Wayne, IN), this was about the median cost (when I bought it). Using our 4% mortgage value above, a $200,000 mortgage would be $8000 per year while the $70,000 house would cost $2800 per year. That leaves me with $5200 more to invest each year than someone living in the bigger house or (so-called) better neighborhood. Plus taxes and insurance cost less.
Hmmmm, seems I've been off on a rant here. Maybe sometime I can list some of my other rules for getting rich. I someone asks.