Was just listening to a guy named Rick Edelmann on the radio, who’s a staunch opponent of paying down mortgages early, and tosses out the CW on debt-to-income ratios as justification. Here’s the rationale:
Extra payments make the bank rich. Take that extra money (particularly the 13th-month payment of a 15-yr mortgage plan), and put it in annuities. After 20-30 years, you’ll have so much that you can lump-sum any remaining out of your mutuals, and still have lots of money left over. Plus, you’ve got liquidity the whole time.
I wonder how much the money managers are paying him to give that advice.
Let’s do the math. But we’ll leave the math out for now. If I pay a thousand every month, and a large proportion of that is interest rates, then everything I pay down ahead of time as a principal payment cuts those interest rates. This yay-hoo’s strategy is to hope that the yields from the mutual fund outpace the interest paid on the mortgage. Maybe yes, maybe no. Money managers give advice that’s good for money managers. They want to play with your hard-earned. But what if you need your hard-earned?
But if I pay off my house within five years, which can be done if you’ve avoided affluenza and bought within your means (we’ve been in the house for three now, and would be a bit better than 60% paid off if our little castle hadn’t required vast swarms of repairs and updates), then once that’s done, you’re pocketing your paycheck.
So, tell me again, how making small interest rates and being shackled to a monthly payment is better for building wealth than taking home the entirety of your paycheck, and then putting as much of that as desired into investing? Tell me how anything is more liquid than pocketing the entirety of your net paycheck?
Plus, you’re less liquid long-term, because your ability to both make your mortgage payment and put in the mutual fund payment (and remember, if you’re not paying into your mutuals, you’re by definition whacked under his scheme) is dependent upon keeping up your regular income at your job.
Well, what if you turn 50 and get laid off in yet another round of the ubiquitous age discrimination? If you’re debt-free and have a bucket of cash drawing interest and some investments here and there… you’re fine. Take six months, see your kids,drive around the country, and either get rehired in a place that will respect your experience, or take the hobby job you’ve always wanted anyway. If you’re a two-income person, you’ve been living off one and pocketing the other (even with kids) anyway, so by year five of your mortgage-free existence, even a complete schmoe can have their FDIC-insured maximum of a hundred grand in the bank as insurance.
Under the CW, you’re screwed. You’re a serf, shackled to your job in order to make ends meet. Maybe you like your job. GREAT!! But wouldn’t it be nicer to work at a job you like without having to do so come hell or high water, and have the actual freedom to make choices for you, rather than choices that make money managers rich?
Don’t be a peasant.