Back to Rants and Raves
High Yield Investment For Turbulent Times
By Sammy of Stone Marmot
Oct. 17, 2008
Right now the economy is not looking too good. Stock values have dropped dramatically and interest rates are approaching 0 %. Where do you put your money to get safe and high returns?
Simple! Pay off your debts. If you are paying 12 % interest on a credit card balance, any dollar you contribute to reduce that balance is effectively earning 12 % interest, since it is reducing your interest payments by that much. If you are paying 7 % interest on a home mortgage, any money you pay towards reducing the principle owed is effectively earning 7 % interest.
Of course, this works best if you are reasonably confident that you can and will eventually pay off the debt in full. If you are afraid there is a good chance of your being layed off in the next month or two, this may not be such a good thing to do, unless you think you can pay these debts off before you get layed off. Fortunately, most of us aren't in such dire straits.
Paying off your debts is a lot easier than you think. In fact, once you start towards doing it, it becomes almost addictive. Every dollar you reduce your balance owed results in a greater percentage of each future payment being applied towards paying off the balance, speeding up paying off the balance.
I'm speaking from experience here. I had a 30 year mortgage. After three years of normal payments, I had a bank CD come due. I realized if I invested it in any reasonable term new CD, I'd get an interest rate at least a 4 % less than what I was paying on my mortgage. So I put the money toward the principle of my mortgage, which reduced the principle by about 10 %. Suddenly, instead of another 27 years of normal mortgage payments remaining, I only had 19 years. A few months later I had another CD mature worth about 5 % of my initial mortgage. I applied it towards my mortgage, which was reduced to less than 16 years. Soon I was putting every spare penny possible towards paying off the mortgage, which was paid off less than three years after making that first supplemental payment.
You have absolutely no idea how free you feel as when you first become debt-free. My living expenses dropped very dramatically as each debt was paid off. You feel incredibly rich on very little income.
One of the best ways to help the homeless in general is to make sure you don't become one of them. They can't take your home from you once you own it free and clear, unless you don't pay your property taxes. But since part of your mortgage payment is probably escrow towards your property taxes, these taxes should be significantly less than your total mortgage payment and much easier to come up with.
Many “experts” argue against paying off your mortgage early. But most of these “experts” have a stake in you not paying off your mortgage early. Bankers make money off your interest payments. Realtors know that people who own their homes free and clear are less likely to sell their houses or assume new debt (hence, less business for realtors), plus there is no old mortgage for a potential buyer to assume, giving the realtor less flexibility in selling your house (though it does reduce your future risks). Investment advisors make money off the money you give them to invest, and any money you apply to paying off your mortgage is money they can't invest and, consequently, make money off of.
Some will argue that you lose a tax break by not having a mortgage. I personally found that for every dollar I saved in taxes, I had to pay at least four dollars in interest. Even if you are already eligible to itemize your deductions and in the highest tax bracket, you have to pay almost three dollars in interest for every dollar you save in taxes. If you think this is a good deal, I have a bunch of $1 bills I'll sell to you for $3 each (Don't you suddenly feel very stupid?).
For years, many have lamented the high amount of debt that the average American household has. Others have argued that this high debt is countered by the vast retirement savings many of these households have. But the value of the debt is fixed whereas most of the savings, as we have been recently painfully reminded, is on paper and based on faith in the market. It is this high average debt that has led to such dire market conditions. So, do yourself and the country at large a favor and get rid of as much of your debt as you can. If you have ANY debt, YOU are the cause of today's problems.
Note that I am not a licensed investment professional. This is just based on my own personal observation and experience. I myself have followed this advice and am very happy with the results. I'm just exercising my right to free speech and sharing what has worked for me. But obviously your results may vary and follow at your own risk.
Back to Rants and Raves
© 2003-2010 Stone Marmot Enterprises, all rights reserved.