Friday, November 22, 2013 - Article by: Travis Carter - Inland Bank and Trust -
Grow Capital or Pay Off Debt
This is the primary question of most families seeking a comfortable retirement. Unfortunately this question can be answered in multiple ways and the majority of solutions/answers depend on some very important questions you must first answer for yourself.
1. Are you financially literate? Do you understand investment tools and strategies.
2. At the end of every budget cycle, how much disposable income do you have?
3. What is your ideal retirement scenario. Little management and stress or simple. Do you want to "go where the wind will take you"? How tied down are you going to be? Do you intend to travel or stay put in a minimal number of locations?
once you have answered these questions, simply write the answers on a scrap book. Not only will these questions answer how you will steer your financial future but it will also remind you what you are working for. Hopefully you will not only have a clear plan for the future but you will face the world during your next work day with a new sense of drive and clarity.
Next we need to understand the basic use of a balance sheet in finance. 2 examples below should help with this.
1.) If you Owned a home worth $250,000 and you paid the mortgage off in full. What would your net worth be (Assuming this is the only thing taken into consideration)? The answer is $250,000. The value of your home that is owned free and clear.
2.) If you owned a home worth $250,000 but had a Refinanced Mortgage for $250,000. The cash received from the Refinance ($250,000) was placed into an investment/savings account. So the final result is a Mortgage owed of $250,000 and a Cash/Investment account valued at $250,000. In this completely different scenario, what is your net worth? The answer is also $250,000.
These examples represent 2 completely different philosophies ( Debt vs No Debt ) but result in the same financial conclusion. As a lesson to all of my clients I explain that there are two methods to paying off a home. One is owning the home free and clear and the other is having enough liquid assets to pay off the mortgage whenever you want. Where things start to differ is when we discuss the other 2 important variables. Cash-flow and Lifestyle.
Although both examples above result in the same Net Worth, the possibility for cash flow is entirely different.
First, The man with a $250,000 mortgage also has $250,000 to draw from in the event of an emergency. The man that owns his home free and clear, does not. I always receive the same response when I explain this scenario. "But the man with the Mortgage is Paying interest on a mortgage?". And this is a valid concern. But by interest gains and losses we discover why this COULD still make sense.
If the "man with a mortgage" pays 4.5% interest rate annually ($11,250) and has $250,000 invested at an annual 6% return ($15,000), then the man with a refinanced mortgage earned an additional $3750 in the first year of "being in debt". Now I have also received responses like.. "That is a big hassle for $3750?. However, lets keep in mind that this is only the first year. The $3750 is an annual amount and if reinvested we must take into consideration compound earned interest as well. For more information on available Plattsburgh Mortgage Rates or a Plattsburgh Refinance use the form Below.
After ten years of this 6% return strategy. the man with a mortgage would have $56,143 additional in an investment account. The cost of earning this money ???? Sending a check to a mortgage company every month. This scenario allows for endless investment opportunities; of course a financial adviser should be consulted.
The Man without a mortgage also has some gains to be realized. First, the home value can increase. With increased value comes a greater net worth. But lets not forget a very important fact. Something is worth only what someone is willing to pay. What if the man without a mortgage needed to liquidate (Sell fast) and could not? What if mortgages became difficult to obtain and only a cash buyer could afford the home. Would it be worth the same amount that it is today?? Would it even sell?? If you needed to refinance, would the Plattsburgh Mortgage Rate still be in the 4?s/ 3?s or would it have increased.
I feel there are good points and bad points to every scenario and it is important to not join the extremist in either scenario. In my opinion, the best option would be to borrow and maintain 50% debt on the home and 50% of the homes value in an asset such as an investment account. With this scenario, the (Diversified) man ensures that the value of the home will not fall below the amount owed (Negative Equity) and that there will always be cash flow and an asset to draw on in case of an emergency.
The last thing to take into consideration is Lifestyle. We know that some people just are not in a position to manage the debt or understand the investments. If this the case and you want to travel the world, are close to retirement, or simply fear investments, a debt free lifestyle is more suitable.
For more detail on any of these subjects give Bridgeview Bank Mortgage Company a call at 518-536-0380 or fill out the form below.
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