June 5, 2007

My Financial Planner/CPA Said...

If there is one thing I can't stand is people who think paying off your home is a bad thing. I talk to many people and most of them talk to their Financial Planners or CPAs and want to get their opinion on the Money Merge Account from United First Financial. The most common response I get is their Financial Planner/CPA said that instead of paying off their mortgage to use their discretionary income and invest it.

Now, I'm not a Financial Planner or CPA, but I do have common sense. I've ridden the investment roller coaster many times and lost my butt (remember the Internet boom in 1998). So, I don't understand how someone can give advice where it would be better for a person to put money in an investment instead of paying off their mortgage FIRST, THEN investing.

To put this to rest, let's look at some hard numbers:

John Doe gets paid bi-weekly and has $500 in discretionary income. He has a mortgage of $200,000 at 6% 30 years fixed which has a payment of $1,199. Using the Money Merge Account, he would pay it off in 10.4 or 125 months.

Now, click on the below link to go to a investment calculator:

Investment Calculator

Let's say John Doe instead of using the $500 a month to payoff his mortgage instead invested it and was able to get an 8% yearly return (remember to put the starting balance at $0). Punch this into the calculator and we get $745,179.75. Not bad.

Now let's do the same thing, but we are going to decrease the number of years to 19 (because he spends the first 10.4 paying off his mortgage) and increase the amount we contribute to $1,699 (which is his mortgage payment plus the $500 discretionary income). By doing this, he would end up with $904,518.69.

So, by paying off his mortgage first and then investing his mortgage payment and discretionary income, John Doe ended up with $159,338.94 more. The great thing about this is John Doe's mortgage is paid off, so even if the investment started to do badly, he can always use the money somewhere else, BUT HIS MORTGAGE IS PAID!!!

So, do you think your Financial Planner/CPA really has your best interest in mind??? Think about it, even if the numbers were reversed, would you sleep better at night knowing your mortgage is paid off and you had $159,338.94 less after 30 years? I don't think you would hate me for that.