How to Make 100% or More on Your MoneyBy David Berky
No, this is not some futures or commodities trading strategy. You don't have to join a cult or an MLM. And youcan do this for years. The only qualification is that you have a mortgage or homeequity loan.
You can achieve more than 100% returns on your money simply by paying extra money on your mortgage each month or asoften as you like.
Here's how it works: If you have a 30 year mortgage at 7%, for each $100 of your loan amount you will end up paying asmuch as $209 in interest. So within the 30 years of paying off your mortgage, you will repay that $100 that youborrowed PLUS you will pay up to an additional $209 in interest.
Good budget software - FREE 15 Day TrialFree download now...So if you "invest" an extra $100 along with your first mortgage payment, you will end up saving $209.42. That's areturn on your "investment" of 109%! And it's guaranteed.
Plus you have just lowered the amount you are in debt and reduced the time it will take for you to pay off yourmortgage. How many cold-calling investment brokers can offer you a deal like that?
So you could look at it as investing the $100 in your mortgage means that there is $309.42 you won't have to payout in the future. You could even argue that this is a return of 209%.
But what if you are several years into your mortgage. Well, even if you are 10 years into your mortgage (and the averagemortgage only lasts about 7 years these days), you can still save $139.42 in interest by paying an extra $100. Or if youare 20 years into your mortgage you will still save $69.42 by paying an extra $100.
So what have you got to lose but your mortgage debt?
So why don't more people do this?
Probably because the conventional "wisdom" says that if you can earn a better rate with an investment than what you arepaying on your mortgage you should invest instead. If you are paying 7% on your mortgage and you can earn 11% in thestock market, it seems a no-brainer that you should invest in the stock market.
There are two problems with this philosophy: first, the 11% stock market figure that is widely quoted is an average overthe past 30 years. Returns in the stock market have averaged on a yearly basis both higher and lower than the11% rate. How do you know when you are investing in a year with negative returns? Unless you are in the financialindustry you are probably taking as big a gamble as you would in Las Vegas playing the Roulette Wheel.
The other problem is that both inflation and taxes will eat away at your 11% return. Taxes can eat up to 2% of it andinflation can take another 3%, leaving you with only 6%, which is less than your mortgage. And that's assuming youactually get the 11% return that year. Also remember that years in which high returns in stocks are enjoyed are alsooften accompanied by higher than normal inflation rates.
But some people will not be persuaded and will insist on investing in the stock market before paying off theirmortgage and that is understandable. We all want to build some sort of retirement nest egg or have an emergency fundthat is growing by more than the dismal rates offered by bank savings accounts or money market accounts.
But if paying down your mortgage makes sense at 7%, how much more sense does paying down your higher interest rate debts.If you have a credit card charging you as much as 24%, it makes way more sense to pay this off before investing anymoney in the stock market.
Some people would argue that it is good to invest always even if you have debt. But that is contrary to the overallgoal of increasing your assets and wealth. For example, let's say you owe $1058 on a 24% credit card and you have anextra $100 each month. You decide to make your minimum payments while investing the rest into the stock market.
If your stock market investment gives you a 12% rate of return you will have about $996 at the end of the year ($100- min pmt x 12 months + "interest"). But you will still owe $1079 (more than you started with) on your credit card.
Viewed another way; you paid a total of $1200. Adding together the negative credit card balance and the positiveinvestment value gives you have a net value of $-83. Instead, if you use the full $100 to pay off your debt, youwill be debt free at the end of the year. You won't have an investment but overall you will not still be negative. Thenext year, you could invest the full $100 into the stock market. But if you still had your debt, you could onlyinvest $78.50 while still making your minimum credit card payment ($100 - min pmt: $21.50 = $78.50).
Good budget software - FREE 15 Day TrialFree download now...Now if you take this scenario and play it out over 5, 10, 15 even 20 years you can see how paying your debts off now cansave you $1000s in interest and help you pay off your debts sooner. Once your debts are paid off you can use ALL of theextra money to invest.
Numerically it is much better to pay off your debts first. But since your stockbroker makes his money off yourinvesting what do you think his advice will be?
------------------------------------David Berky is president of Simple Joe, Inc. makers of the popular Debt Eraser PC software, which helps people create a rapid debt reduction plan to get themselves out of debt much sooner and save $1000s in interest payments. Visit http://www.simplejoe.com/debteraser for more information.