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What’s the best investment you can make in 2018? Three considerations—taxes, risk and the economic cycle—point to one conclusion: Paying down debt looks like an awfully smart move.

Unless you understand 4th grade math. Then it makes almost no sense.
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No. of Recommendations: 3
What’s the best investment you can make in 2018? Three considerations—taxes, risk and the economic cycle—point to one conclusion: Paying down debt looks like an awfully smart move.

Unless you understand 4th grade math. Then it makes almost no sense.


Yeah, that thing of spending a buck so you can save 30 cents on your taxes is so obviously the right approach...

... and cutting it to 15 cents will make it even better.
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Yeah, that thing of spending a buck so you can save 30 cents on your taxes is so obviously the right approach...

... and cutting it to 15 cents will make it even better.


Has nothing to do with taxes. It is all about best use of funds. You can spend that buck and save 4% at some point in the future. Or you can invest that buck and, last year anyway, you would have gotten 20% in your hand. And the buck actually is in your hand. If you pay extra on the mortgage, the bank controls the equity, not you.

Over any 30 year period, the stock market historically has average around 10%. So by paying down the mortgage, you save 4% and give up 10% Does that make sense to anyone?
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Guys, this was/is an opinion piece from Market Watch.

https://www.marketwatch.com/story/paying-off-your-mortgage-c...

Your argument is with them.

Desert (I report, you decide) Dave
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No. of Recommendations: 5
What’s the best investment you can make in 2018? Three considerations—taxes, risk and the economic cycle—point to one conclusion: Paying down debt looks like an awfully smart move.

Last year, DW and I got rid of our last long-term obligation, a $500/mo mortgage payment. The modest improvement in free cash flow helped make Christmas presents and year-end property taxes a bit more manageable. Our real estate taxes have exceeded our mortgage payment for decades.

DW doesn't like to have any debt, regardless how low the interest expense. For this reason, she never would allow me to take advantage of the 0% automobile loans that came up from time to time.

I have a very, very old American Bar Association co-branded Visa card that has a fixed 7.9% interest rate and a high credit limit. Based on the original cardholder agreement, a 7.9% interest rate is permanent, so long as I am never late with a payment. If I breach the terms of the agreement, I believe that the bank is allowed to increase the card rate to the prevailing rate (which I think is somewhere between 18% and 27%).

From time to time, the current bank, which bought the ABA-branded credit card portfolio about a decade ago, tries to convince legacy card holders to switch to a "cash back" or "member rewards" agreement, so as to finally get rid of the remaining portfolio of 7.9% credit cards.

They also sometimes offer to issue loans on checks they send, with 0% interest for 12 months. I don't have any idea why they would offer 12 months of free interest to card holders whose cards are already low-margin accounts. Maybe they figure that we old codgers will write a bigger check than we'll charge on a card. Maybe statistically, account holders who take cash advances with loan checks are more likely to be late with a payment, which would enable the bank to use the "gotcha" clause in the credit agreement to permanently escalate the interest rate.

I really can't figure out what is the bank's angle, but I have been tempted to use one of those checks to borrow a few thousand to fund a business venture for the next 12 months at 0%. If I did, DW would heatedly remind me that she is the one who would be stuck with paying off the loan if I were to suddenly cross over to the other side.

I'm working on a venture funding campaign to post on www.indiegogo.com for a device I invented and got patented. Part of the indiegogo campaign will be an effort to recoup sunk costs. I advanced the $12,0000 Patent Attorney's fees, as well as fees to the US Patent & Trademark Office for the patent and for the trademark application. In the last few months, I've also incurred $2,000-$3,000 out-of-pocket in initial prototype expenses. Within the next few weeks, I'm due to receive a bill for about $3,000 for a writer/animator/producer who's working on a 1-minute explanatory animated film.

I'm seriously considering writing one of those 0% credit card advance checks to pay the film maker and/or a CAD design consultant I am working with to refine the prototype.

Maybe I should call the issuing bank to see exactly what sort of hidden "gotcha" there might be buried in the check advance program that would allow them to permanently increase the 7.9% fixed rate on the account to the prevailing 18% to 27% rates.

Seems like much ado about nothing, I guess. I very rarely carry a balance on the card at the 7.9% rate, unless it's for cashflow management and/or to pay big medical bills. Maybe I'm being neurotic to try and hang onto a fixed rate 7.9% credit card just because I remember when mortgages were 15% and credit cards were 27% to 30%.

</end stream-of-consciousness post>
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No. of Recommendations: 2
Opinion: Paying off your mortgage could be the smartest investment of 2018

How do you define "smartest investment?" Highest return? Least risk? Average return with average risk?

I happen to be debt averse so I have no mortgage to pay off in any case. My "smartest investment" is buying ten-baggers!

The Captain
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No. of Recommendations: 8
Last year, DW and I got rid of our last long-term obligation, a $500/mo mortgage payment. The modest improvement in free cash flow helped make Christmas presents and year-end property taxes a bit more manageable. Our real estate taxes have exceeded our mortgage payment for decades.

DW doesn't like to have any debt, regardless how low the interest expense.



Mutt,

We all have to make our own choices and debt properly used is a tool. I have however watched debt destroy families and businesses and even end up with jail time for people I knew (fraud situation). It all seemed so easy back in '06 to buy another house or SUV, trips to Paris to give the kids a good time. Daughter's neighbour in Oakland thought anyone not buying houses at zero down was an idiot. Another neighbour was moving out of their home across the street to move into a winery they also bought on credit, don't know the details other than the house was being taken by the bank and the winery wasn't ... yet.

I locked in at 10.25% in '79 watched mortgages go over 18%, watched people selling homes or begging family for financial help, turned down a BIL who asked if I could help him out, I couldn't.

Clearly most people can handle credit, just like some people can handle drugs I suppose? I just sleep better at night without it.

As to the car thingy, I really don't understand why the dealers try so hard to get you to take on debt to buy a car? I had to get downright nasty to get across to them I wasn't taking their credit offer. The guy was practically whining and mentioned it only needed to be for six months (kickback?).

Not long ago I stumbled on this: https://thehackernews.com/2017/12/nissan-finance-breach.html...

Nissan warns of a possible data breach of personal information on its customers who financed their vehicles through Nissan Canada Finance and INFINITI Financial Services Canada.

I emailed it to the sales guy and asked if he still thought it was a good idea to take his kind offer? }};-D

He had the nerve to tell me that they were offering free credit monitoring to anyone affected by it ... seriously!

I've been debt free for a very long time, don't miss it, sort of nice to know the money coming in is all mine to pay the bills and spend or save as I choose.

Clearly your own mileage may vary.

Tim
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No. of Recommendations: 2
Hi notehound!

Be careful of these (and maybe some new) "gothchas" when playing the 0% interest game:

From a post back when rates were much higher:

....Went online and set up the ability to pay online in order to avoid another potential pitfall--lost or late mail, which will trigger interest penalties. They win! While it is possible in many cases to set up automatic minimum payments to each card loan, I chose to do it manually each month, just to be sure ( hey, garbage in, garbage out ) and to monitor the situation for both my payments and any erroneous interest charges. So far, no glitches have happened, but better safe than sorry.

6.Still another “hook” some of these guys can get you with is the “Universal Default Clause”, a practice that I find almost unethical and one that should be made illegal. This nifty little gizmo may trigger interest penalties for a change in your credit score ( when, for example, your debt to available credit suddenly skyrockets, possibly caused by this strategy, or even when you are late
with a bill to another lender ). Now, neither of these things has happened to me in the past two years, however, read your fine print, and when in doubt, call the card companies 800 number and
get clarification on these issues…..being sure to note down the name/date/time of the info…..'cause if this clause is there and it triggers, they win!

Footnote: If this were to happen, the first order of response would be to call/complain loudly and say that if no relief is given, you will pay off the loan and cancel your card. They hate to lose card customers!

7.Other caveats include being sure that the amount you can earn on a 0% loan for is large enough to offset any upfront fees and is worth the time you expend and be sure that online funds transfers/payments are free....


http://boards.fool.com/making-277hour-with-debt-and-discipli...

Cheers!
Murph
II and PP Home Fool
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No. of Recommendations: 5
Over any 30 year period, the stock market historically has average around 10%. So by paying down the mortgage, you save 4% and give up 10% Does that make sense to anyone?

Risk-adjusted returns can vary wildly, regardless of absolute stock market returns. Individual stock performance also can vary wildly depending upon exactly which stock one picks.

Depending upon the size and liquidity of one's savings, paying off long-term low fixed rate debt in a rising rate environment may not make sense. However, avoiding adjustable or high interest rate debt is almost always one of the easiest ways to conserve capital in a rising rate environment.

The risk-free rate of return (for one either in retirement or extremely risk-averse) is considerably less than the 10% historical stock market average you have suggested. Likewise, individual stock performance can vary wildly and may never reach the average 10% market return rate. That's what makes individual stock picking such a research-intensive challenge.

Most people of any risk tolerance level would be better off if they followed Bogle's and Buffett's advice to just use index funds if they wish to achieve an average or above-average return on stocks.

I am pretty sure that anyone with a high interest debt obligation (for instance an 18% to 30% credit card balance) or an adjustable rate mortgage loan with no rate caps would be well-served by paying down debt.

Different strokes for different folks, ya know.

;-)
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6.Still another “hook” some of these guys can get you with is the “Universal Default Clause”, a practice that I find almost unethical and one that should be made illegal. This nifty little gizmo may trigger interest penalties for a change in your credit score ( when, for example, your debt to available credit suddenly skyrockets, possibly caused by this strategy, or even when you are late with a bill to another lender ).

Yowza! Murph, I'll bet that's it.

It would be so easy for the bank to implement a process whereby a customer's use of one of those 0% cash advance checks would automatically trigger a review of the customer's current credit score, debt-to-income ratio, or percentage of debt to available credit.

The bank could then compare those measurements against the scores and ratios at the time the customer originally applied for the card. If the current figures represent a greater credit risk to the bank, it would represent a "change of circumstances" rendering the original underwriting no longer adequate to protect the bank's interest.

Such a "universal default" or "material change of circumstances" clause would be a clever way to escalate rates if an event triggered a comparative underwriting review. The exercise of using a 0% cash advance check would represent exactly the sort of trigger event that would justify a look-back or comparative review.

Credit card issuing banks have so many ways in which to screw customers. It makes one almost want to start a new bank or buy an existing one just to be able to figure out clever ways to play games with credit card customers.

Wanna start a bank (headquartered somewhere like South Dakota, where the regulations are banker-friendly)? I'll be glad to serve on the board and help with writing the credit card contracts if you'll be willing to move to South Dakota (if the rules happen to require at least one employee and/or location in the state).
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Still, over the next 10 years, you probably won’t earn more than 5% or 6% a year from U.S. stocks, barely more than the 4% interest you might avoid by paying off a mortgage.

My mortgage rate is 2.625%. I'll stick with investing instead of paying off the mortgage.

PSU
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....Wanna start a bank....

Think I'll pass, notehound....gotta be able to look in the mirror every morning! ;-)

I'm tired of the "banksters" and the politicians they buy privatizing profits and socializing losses.

IMHO, any bank too big to fail is one too big to exist....break'em up!

Cheers!
Murph
II and PP Home Fool
(anti-banksters)
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They also sometimes offer to issue loans on checks they send, with 0% interest for 12 months. I don't have any idea why they would offer 12 months of free interest to card holders whose cards are already low-margin accounts. Maybe they figure that we old codgers will write a bigger check than we'll charge on a card. Maybe statistically, account holders who take cash advances with loan checks are more likely to be late with a payment, which would enable the bank to use the "gotcha" clause in the credit agreement to permanently escalate the interest rate.

Sometimes there is a fee (typically 2%) to get the 0% interest. So even if you pay it off in full the next month, they still collect 2%--which is not a bad monthly return!

Also typically if you don't pay it off by the end of the 12 months then the interest goes to some astronomical number, charged retroactively.
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Risk-adjusted returns can vary wildly, regardless of absolute stock market returns. Individual stock performance also can vary wildly depending upon exactly which stock one picks.

Depending upon the size and liquidity of one's savings, paying off long-term low fixed rate debt in a rising rate environment may not make sense. However, avoiding adjustable or high interest rate debt is almost always one of the easiest ways to conserve capital in a rising rate environment.

The risk-free rate of return (for one either in retirement or extremely risk-averse) is considerably less than the 10% historical stock market average you have suggested. Likewise, individual stock performance can vary wildly and may never reach the average 10% market return rate. That's what makes individual stock picking such a research-intensive challenge.


A central assumption should be that the mortgage is a 30-year fixed (which is the large majority of all mortgages) and low interest, which 4% certainly is. If it is variable interest or high interest, then obviously the decision making matrix changes a lot.

Your definition of risk-free adjacent rate of return is the same as it commonly used in academia. Basically, the return minus the risk free return, divided by the volatility (Sharpe ratio). Michael Kitces who IMO is one of the most astute financial writers out there thinks of it this way. However, I don't think it is very useful for most investors. I like to view risk as the chance of the permanent loss of capital. I don't care what the volatility is as long as I make money. One problem is that no one can actually get the risk-free return over any reasonable period of time. The risk-free return rate is usually defined as the 10-year Treasure rate. But there have been lots of times over the years when the 10-year actually lost money due to inflation.

But for any reasonably long investment horizon, the risk of losing money in the broader stock market is very low. Since 1871, the S&P (with dividends reinvested) has been positive in 90% of rolling 10-year periods, and positive in 100% of rolling 20 and 30-year rolling periods. Of course, the future could be worst than the past, but over the 30-year term of a typical mortgage, the risk of investing in the broad stock market has been zero. No one ever lost a dime by simply owning the index over that period. That still true when adjusted for inflation. That's not true for US treasuries. So I'm not a fan of the risk-adjusted ROR as commonly used.

Anyway, that's a minor point. Back on the 30-year mortgage question. With a little bit of karate, you can use FIREcalc to simulate the effects of paying off a 4% mortgage or not on your final portfolio value (based on historical data). Not paying off the mortgage not only greatly increases your average final portfolio value, it also reduces the risk of running out money in retirement.

https://www.firecalc.com/
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A central assumption should be that the mortgage is a 30-year fixed (which is the large majority of all mortgages) and low interest, which 4% certainly is. If it is variable interest or high interest, then obviously the decision making matrix changes a lot.


Well so much for central assumptions, the longest fixed I had available in Canada was 5-year though at the very end when I was down to that last few years I saw a few 7-year ones show up, no longer useful to me at the time.

I can't help but think the 30-year thingy must have been a US government program? We Canucks also didn't have mortgage interest deductions. The lowest rate I ever saw was slightly over 8% (though the variables were often lower) with 10.75% the highest.

While it seems counter intuitive, Canadians have higher home ownership rates and much lower mortgage default rates? Of course we couldn't hand in the keys and walk away.

Tim <hates debt>


https://www.cmhc-schl.gc.ca/en/hoficlincl/observer/observer_...

On Friday, the Census Bureau will remind us that the homeownership rate is at or near an 18-year low. After rising to an all-time high of 69.2 percent in 2005 near the height of the housing bubble, the homeownership rate fell to 64.9 percent in 2013, the lowest level since 1995.Jan 30, 2014

https://www.cba.ca/mortgages-in-arrears

https://fred.stlouisfed.org/series/DRSFRMACBS
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Generally the numbers favor investing over paying off the mortgage, but some very smart people think the stock/bond returns for the next 10 years are going to muted, at best:

http://beta.morningstar.com/articles/842900/experts-forecast...

If you are within 10 years of retirement, and if you are unlucky in terms of retiring on the eve of a serious downturn, it may be a better than average time to pay off your mortgage.
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Clearly most people can handle credit, just like some people can handle drugs I suppose? I just sleep better at night without it.

Well, we agree on that!

As to the car thingy, I really don't understand why the dealers try so hard to get you to take on debt to buy a car?

If you finance through a dealership you're almost certainly giving them free money which is why they are so keen on signing you up for it.

I've been debt free for a very long time, don't miss it, sort of nice to know the money coming in is all mine to pay the bills and spend or save as I choose.

Again we agree!
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Generally the numbers favor investing over paying off the mortgage, but some very smart people think the stock/bond returns for the next 10 years are going to muted, at best:

http://beta.morningstar.com/articles/842900/experts-forecast......

If you are within 10 years of retirement, and if you are unlucky in terms of retiring on the eve of a serious downturn, it may be a better than average time to pay off your mortgage.


That's why I recommended using FIRECalc, so you could see what the likely outcomes would be in bad times. Even if you would have retired at a historically bad time, not paying down the mortgage gave higher final portfolio values and increased portfolio survival rates. To put it another way, in the worst years paying down the mortgage increases the risk of a busted retirement.
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