I recently saw an article posted from an “expert” in financial planning. The expert told people to not focus on paying off their debts (specifically a mortgage) and rather focus on investing money.
Hmmm… perhaps this advice was because they are selling investment products. Could it be that the “expert” was more interested in lining his own pockets rather than help someone actually develop a financial plan that was based on security, cash flow, and investments.
Anyhow, here is my response to his posting. Hopefully you find it useful:
I am concerned about your article. It is filled with some generalization and misguided advice.
To start, your quote from Donald Trump is taken out of context. You are taking a business practice of borrowing money (which is tax deductible) and applying it to general home purchase (non-tax deductible). Of course he uses someone else’s money to build a building, he also uses a separate corporate entity to protect himself against bankruptcy should that business transaction fail.
The advice you are giving in this article is NOT the same thing as a Donald Trump business transaction. Rather, you’re advice places 100% of the risk on the reader.
Yes, taking a responsible approach to financial planning is a good idea, however, I firmly believe that taking a measured approach to paying off the mortgage is a responsible financial step.
You’re assumption that mortgage interest rates will remain low and that the markets will continue to grow has some flaws. While statistically the trend over a 60-year period shows a slow increase in the stock market value, the trend is an over-simplification of bull and bear markets.
Look at the last economic shift in 2008. People lost significant amounts of money and personal wealth from their investments due to a rapid market swing. People also lost their homes due to a variety of reasons – mostly inability to pay because of financial hardship.
When a market swings, people can lose a major portion of investment savings over night. They may still own the stock, but if the stock price drops drastically, the investment will be reduced. Even if the reduction is temporary and the market eventually corrects itself in a few years (2008-2010), this can leave a family with little to no savings. Mix in a job loss during the downturn and a family may not be able to pay the bills.
Why it is critical to pay off your mortgage:
Security and cash flow! If for no other reason, it is vital to work towards paying off a mortgage for the simple fact that when you pay off the mortgage, it reduces a significant burden on cash flow. There are other advantages to paying off a mortgage, but security and cash flow are at the top of the list.
Other advantages to paying off a mortgage:
- You are paying 0% interest when the mortgage is gone
- It builds equity
- It eliminates an ongoing cost
- It improves financial credit rating (allowing you to borrow money at a lower rate if needed)
- It makes it easier for estate planning
- It reduces the burden on loved ones
My recommendation is that you spend less time talking about “mommy and daddy” and more time teaching people about cash flow. As someone else has already commented, the need to have $1 million in savings in order to retire may not be accurate – and they are correct. The real secret to financial security is understanding how much money is coming and going out.
In a follow-up comment, the “expert” went on to make a few more points… here is my reply:
I agree, having a balance on a credit card is simply foolish. This is the first debt to be eliminated.
The next step is to understand WHY there is a balance on the card. Why was it there? How can your personal lifestyle and cash flow be altered so that you don’t have a balance. This is the critical step.
As for your advice about 5% conservative investments… that is poor advice. A conservative investment in a GIC is currently paying under 2%. You must compare like-to-like investments and debts. A mortgage is a fixed debt with a fixed timeframe, so you must balance that with a fixed income investment. This means an investment vehicle such as a GIC or a bond as it has a fixed income with a fixed timeframe.
Why must we compare like-to-like? The simple fact is that any other type of investment is a wager – it’s a gamble that the stock market won’t make a drastic change. If the stock market suddenly drops, the conservative investment (not fixed) will drop as well. However, your mortgage will not drop and it will not go away. If you need the investment money to pay bills – such as your mortgage, and it has been drastically reduced, then you’re in serious trouble.
The hard fact is that PROPER investment planning recognizes that the first goal is to ensure financial security. Then, and only then, is it possible to address the risks of investing in the markets.