There is a simple and easy investment that is available to many people that they do not give much consideration. They probably don’t even view it as an investment.
It will give you a guaranteed return and will not generate any capital gains taxes.
The investment I am referring to is paying down the principal balance on your home mortgage. While this is not an option for those who rent or those who own their home outright, I find a majority of investors are in a situation of owning a home and also owing on a mortgage.
I don’t think this is a good option for everyone. It depends on your situation.
But I have seen people who have hundreds of thousands of dollars in investments, with extra liquid money on top of it, and they are trying to figure out what to do with it. Yet I find out that they have a house in which they owe $200,000 or more on the mortgage.
By paying down the principal balance (any payment above the monthly minimum), you are essentially locking in a return equivalent to the interest rate on your loan. If you have a mortgage rate fixed at 4.5%, then any payments toward principal would earn the equivalent of 4.5% (by saving your that interest) and that would be with compounding interest.
This strategy is often overlooked where it might serve as a nice complement to an investment portfolio.
I would not recommend this strategy to someone who is short on liquid funds. If you don’t have an emergency fund or easy access to other money, then you should not use all of your money to pay down your mortgage. You are locking in this money.
The only time you will see this money again is when you either sell your house or refinance. Of course, once you pay off the loan entirely, you will quickly see the benefit in increased cash flow without having to make a mortgage payment each month.
If you decide to make paying down your home loan part of your overall financial strategy, then it is important to realize that it is a hedge against deflation. By locking in a guaranteed rate of return and by reducing your debt, you are protecting yourself against deflation. Therefore, the rest of your portfolio may want to lean in favor of hedging against inflation.
I think paying down your home loan and ultimately paying it off will give most people a powerful feeling. It is nice to own your home outright, knowing that you just have to pay your property taxes and nobody can kick you out.
Again, this strategy isn’t for everyone, particularly those low on liquid funds. But if you have extra money just sitting in the bank, you may want to consider this “investment”, even if it sounds boring. It can add up to real savings over time.
If you own a house with a mortgage, consider diversifying with this simple strategy of paying a little extra on your mortgage each month or possibly making a big one time extra payment
You can’t find a guaranteed rate of return this high anywhere else.
Hey, Geoff. Glad you are back! I have a question: If one accepts the premise that most of the so-called stimulus money is simply sitting as excess reserves propping up the so-called “to big to fail” banks, what’s the harm if it stays there? If that money doesn’t get velocity we won’t see massive, commensurate price inflation. So what’s the big deal? Thanks for reading this and if you have time to answer that would be great.
Thanks for the question. I will answer in a few days. I might answer in the form of a blog post.
Looking forward to it, Geoff. Thanks.
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