Les
Well-Known Member
Bill V, what you wrote makes no sense at all...
Mortgage Questions
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Bill V
Well-Known Member
Not true. In your example, if you paid off your debts, then the $1600 wouldn't be saving money in the sense of increasing your net value, it would be simply replenishing the assets you previously had, that you had used to retire your debt. Paying off those debts means depleting your other assets--and if those assets are capable of earning more by being invested, than the interests costs they would avoid by being used to retire the debt, you're better off leaving them as investments.
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Bill V
Well-Known Member
Les, your comment clearly says more about the you than me...
Bill V
Well-Known Member
If credit cards were available at a lower rate of interest than the return rates that could be garnered by playing the stock market or casino, then yes, it would make sense. But typical credit card rates are far higher than typical stock market return rates, and typical casino returns are negative, which is why such a proposal doesn't work.
But yes, if you give me a credit card with a 4% interest rate, I'll max it out, invest the money in higher-yield investments, and come out ahead of someone who doesn't do it simply because they fear or don't understand the concept of carrying debt.
Thomas Rogers
Well-Known Member
Gavin said:
Now you are just being absurd. Of course I never recommended anything like that.
Still, paying down a 5% interest rate debt instead of using that same liquid cash to invest in something with a higher return is what the old saying calls "stepping over dollars to pick up dimes!"
TJR
Now you are just being absurd. Of course I never recommended anything like that.
Still, paying down a 5% interest rate debt instead of using that same liquid cash to invest in something with a higher return is what the old saying calls "stepping over dollars to pick up dimes!"
TJR
Thomas Rogers
Well-Known Member
BillV said:
Right BillV, right! Thanks for commenting. But you can't tell many people this. Borrowing money to make money, or not paying down on what you have borrowed while increasing other investments just doesn't "feel right" to many people and it goes against the frugile, save money management advise they have been given throughout their life.
TJR
Right BillV, right! Thanks for commenting. But you can't tell many people this. Borrowing money to make money, or not paying down on what you have borrowed while increasing other investments just doesn't "feel right" to many people and it goes against the frugile, save money management advise they have been given throughout their life.
TJR
Gavin Allan
Well-Known Member
Huh? A paid-for house (and SportTrac) is worth just as much as one that is financed? Some would even say it is worth more, due to the higher intrinsic value.
I'd rather have $1600 to invest each month than to pay on loans. I don't see how that is better economically for me to have loans instead of cash, unless you are the bank that made the loans.
By making payments on your debts at $1600, you are also incurring an additional opportunity cost that you would not have if you had the $1600 to invest each month.
Thomas Rogers
Well-Known Member
Gavin also said:
That's a good point, but a moot point. Several times I tried to reframe, restate, and refocus the argument to the scenario at hand; that being that you have a mortgage, and therefore you already have a pretty large monthly recurring debt; and you are posed with the choice of taking a few extra hundred dollars each month and paying that mortgage down.
In that scenario most can find better investments for that few extra hundred dollars a month.
TJR
That's a good point, but a moot point. Several times I tried to reframe, restate, and refocus the argument to the scenario at hand; that being that you have a mortgage, and therefore you already have a pretty large monthly recurring debt; and you are posed with the choice of taking a few extra hundred dollars each month and paying that mortgage down.
In that scenario most can find better investments for that few extra hundred dollars a month.
TJR
Gavin Allan
Well-Known Member
Right now, it appears that owning a house is not a wise investment. Instead of paying on a mortgage, it might make sense to rent or live with mom and dad and SAVE your money and invest it in something so its value GROWS.
Gavin Allan
Well-Known Member
How are you going to build wealth if you have a mortgage to pay for?
Thomas Rogers
Well-Known Member
Gavin asks:
Again, you ask a moot question. The scenario described is that one already has the mortgage and is presented with the question of what to do with a few extra hundred dollars each month.
In that scenario, if the mortgage is fixed at 5% interest, you have $200 to invest at the end of the month, then by all means, it is much better to find a relatively safe investment vehicle that is likely to pay much more than 5%...they aren't hard to find. In that scenario you can build wealth; better, faster, than if you paid down the mortgage with that same $200 each month.
Now, as for the general question, "How is one going to build wealth when they have a mortgage to pay for?", most will tell you that the home that you live is in typically a bad investment and won't help you build great wealth; especially when compared to other investment vehicles.
Most people buy a home not as an investment, but due to other factors, top on the list are because the simply want a home for various reasons that are often personal.
This thread was about mortage questions. Some said to pay down the mortgage early if there is extra money in an attempt to save money. If mortgage interest rates were around 12% and it was hard to find long-term investments that netted any higher returns, then I would agree. But with easy to find long-term investment returns above 10% and mortgage rates still at decade low 5 and 6% range, that old advice simply isn't that sound.
TJR
Again, you ask a moot question. The scenario described is that one already has the mortgage and is presented with the question of what to do with a few extra hundred dollars each month.
In that scenario, if the mortgage is fixed at 5% interest, you have $200 to invest at the end of the month, then by all means, it is much better to find a relatively safe investment vehicle that is likely to pay much more than 5%...they aren't hard to find. In that scenario you can build wealth; better, faster, than if you paid down the mortgage with that same $200 each month.
Now, as for the general question, "How is one going to build wealth when they have a mortgage to pay for?", most will tell you that the home that you live is in typically a bad investment and won't help you build great wealth; especially when compared to other investment vehicles.
Most people buy a home not as an investment, but due to other factors, top on the list are because the simply want a home for various reasons that are often personal.
This thread was about mortage questions. Some said to pay down the mortgage early if there is extra money in an attempt to save money. If mortgage interest rates were around 12% and it was hard to find long-term investments that netted any higher returns, then I would agree. But with easy to find long-term investment returns above 10% and mortgage rates still at decade low 5 and 6% range, that old advice simply isn't that sound.
TJR
Gavin Allan
Well-Known Member
Pay that mortgage off as soon as you can to avoid paying interest fees. Also, the sooner you can pay off that mortgage, the sooner you can start saving and investing your money to build wealth. A mortgage only drags out the pain of being broke and paying interest. As long as you keep having to pay to borrow money, you'll always be a slave to someone who owns you. Hurry up and pay off that mortgage as fast as you can so you can gain some freedom and so you can start keeping some of your monthly paycheck rather than making a mortgage company richer each month.
I don't know how to explain it any simpler.
Les
Well-Known Member
Bill V, you are NEVER better off having debt. Since I DON"T have a mortgage, and I DON"T owe on my ST, T-Bird, or Harley, then I guess I am missing out on the benefits of being in debt !!! Maybe I need to go get some...debt that is...
Jacob Dryer
Well-Known Member
Follow the link below and see all the math that is involved. Investing vs. Paying early has many variables and there is not one cut and dry answer for everyone.
In some cases it works better to invest your extra money in place of paying extra toward your loans. Remember we are talking long term here.
Short term/high interest loans you need to get out of as soon as possible. My boat being a toy needs to be paid off as quick as possible because it is depreciating in value and I'm paying interest on it. My house on the other hand even in this crappy market is going to stay at the same level or make money (long term) so I invest my extra money, and keep some liquid assests that are building to be able to pay my boat off.
In some cases it works better to invest your extra money in place of paying extra toward your loans. Remember we are talking long term here.
Short term/high interest loans you need to get out of as soon as possible. My boat being a toy needs to be paid off as quick as possible because it is depreciating in value and I'm paying interest on it. My house on the other hand even in this crappy market is going to stay at the same level or make money (long term) so I invest my extra money, and keep some liquid assests that are building to be able to pay my boat off.
TomT
Well-Known Member
That's not the American way.
Les
Well-Known Member
Tom T, at least I buy American...
Thomas Rogers
Well-Known Member
Gavin, you don't know how to make it any simpler? You say that, but then you throw emotion into the mix.
Here is a challenge to any and all (Les, give it a whirl)...
It is a simple scenario, very applicable to what we have been discussing:
Let’s say there is this little boy named Tommy. He wants to buy a bike from a department store, but it is expensive, costing $10. He doesn’t have that kind of money, but the department store will sell it on credit to him; 20% simple interest each week for 40 weeks.
Tommy decides to buy the bike, no money down. When he is about to pay his first payment he recognizes that he has 5 cents burning a hole in his pocket. He seems to always have 5 cents lying around. He figures he could pay extra each week on the bike. At the same time his friend Stevie offers him a deal. It seems Stevie gets his allowance on Monday and it is always gone by Friday. Tommy gets his allowance on Friday. Stevie offers to pay Tommy 6 cents each Monday when Tommy gives him 5 cents the Friday before, all so that Stevie has spending money during the weekend.
Which is the better deal; with the better deal being the one that gives Tommy more money in his pocket after paying for the bike? Should he pay down on the bike, or should he loan Stevie the money each week.
Remember, both loans are 20%, simple interest.
The answer will surprise many of you.
TJR
Here is a challenge to any and all (Les, give it a whirl)...
It is a simple scenario, very applicable to what we have been discussing:
Let’s say there is this little boy named Tommy. He wants to buy a bike from a department store, but it is expensive, costing $10. He doesn’t have that kind of money, but the department store will sell it on credit to him; 20% simple interest each week for 40 weeks.
Tommy decides to buy the bike, no money down. When he is about to pay his first payment he recognizes that he has 5 cents burning a hole in his pocket. He seems to always have 5 cents lying around. He figures he could pay extra each week on the bike. At the same time his friend Stevie offers him a deal. It seems Stevie gets his allowance on Monday and it is always gone by Friday. Tommy gets his allowance on Friday. Stevie offers to pay Tommy 6 cents each Monday when Tommy gives him 5 cents the Friday before, all so that Stevie has spending money during the weekend.
Which is the better deal; with the better deal being the one that gives Tommy more money in his pocket after paying for the bike? Should he pay down on the bike, or should he loan Stevie the money each week.
Remember, both loans are 20%, simple interest.
The answer will surprise many of you.
TJR
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Gavin Allan
Well-Known Member
The better deal would be for the Tommy to pay off his bike as fast as he can, and then take the money he was using for the bike payment, plus the "extra" 5 cents and make loans to Stevie, Billy, and Georgie. That way Tommy would "own" the other three little boys and he would profit on their need for credit. Tommy would have no payments, as his bike would be all paid for. Tommy would accumulate wealth quickly, and the additional money he makes off the other three could be used to make loans to little boys in other neighborhoods. The wealth would rapidly accumulate, and Tommy could retire, set for life at age 20.
Yes, paying off debt and properly investing the savings can rapidly build wealth and give a person financial freedom and peace of mind for a higher quality of life.
BTW: Tommy would probably have several bikes in this scenario, because he would reposses several of them from the other little boys who were deep in debt and could not always make their weekly payments.
You still haven't convinced me that taking on debt makes people more wealthy.
Yes, paying off debt and properly investing the savings can rapidly build wealth and give a person financial freedom and peace of mind for a higher quality of life.
BTW: Tommy would probably have several bikes in this scenario, because he would reposses several of them from the other little boys who were deep in debt and could not always make their weekly payments.
You still haven't convinced me that taking on debt makes people more wealthy.
While I understand where TJR is coming from, he insuates we have a bunch of money to invest. For most of the working class, that simply inst true.
Case in point. Someone I am related to makes a guarenteed 8% MINIMUM intrest in his inestments. He has more than almost anyone here has in investments alone. (Not saying he is rich, but I could retire on what he makes in intrest per month) I am not assuming everyone here is poor or doesn't have anything, but he could buy a Rolls Royce Silver Phantom for each day of the week and still have more money...to give you an idea on what he is worth.
He is buying a new motorhome. He wanted to pay cash for it. It would cost him more to pay cash then to make payments for the duration of the loan. Not only the $20,000 in income tax from withdrawing money from his investments, but the loan is 5% for his motorhome.
So, by buying money for 5%, but selling his money for 8% MINIMUM, he is making at least 3% on the $75,000 he would pay for the motorhome.
On the other hand, if you are an average joe with little to no money to inest, you would be hard pressed to find ANYONE willing to pay you 8% to sell them money. The average person just does not have the kind of money.
how did he make all that money? He paid cash for everything. The only loan they ever had was a mortgage payment they paid off in less than 10 years. When they needed a car, the saved money and when they had enough, they paid cash for it.
Could he have been worth more if they put themselves into debt over the years? Doubtful.
Myself, I am able to put $40,000 down on a home. Maybe I would be better off investing that money and then financing the house 100% (Yes, a downpayment would be put down to avoid PMI, but lets say there is no PMI to worry about)
With a $40,000 downpayment, I can buy a $140,000 house with only a $100,000 loan. I can keep my house payment at only 1 weeks pay.
For me, this is a wise decision. If I lose my job, theresa gets pregnant, my parents fall ill, etc. my house payment will not be a big burdon I need to deal with. If times are good and I can work extra hours, I can continue to pay extra on my principle and have my home paid off sooner. The more I pay on the principle earlier in the loan, the better off I will be.
This is just me. This worked for my family member. He is worth a bundle. How many arm chair investors can say the same thing.
So far this quarter, my 401(k) has lost more than I made last year. As of right now, my investments are costing me money.
Tom
Thomas Rogers
Well-Known Member
Gavin said:
C'mon Gavin, why are you being so stubborn. Worried you might learn something?
I gave a pretty simple math word problem with very specific instructions on determining which is the better of two options.
I gave the scenario, I described the terms of what "best" means and you didn't even have the respect or courtesy to evaluate the options provided and instead gave hyperbole opinion.
What are you afraid of?
TJR
C'mon Gavin, why are you being so stubborn. Worried you might learn something?
I gave a pretty simple math word problem with very specific instructions on determining which is the better of two options.
I gave the scenario, I described the terms of what "best" means and you didn't even have the respect or courtesy to evaluate the options provided and instead gave hyperbole opinion.
What are you afraid of?
TJR
