Have you ever created one of these mortgage spreadsheets?
It is a very good exercise. Here’s the most important step: open this spreadsheet and add up the interest you’ll pay over time, assuming you don’t make any prepayments.
The answer will probably blow your mind.
Read:The 10 commandments of retirement
For example, on a 30-year 4% fixed rate mortgage of $250,000, you will actually pay about $430,000 in total over those 30 years.
Every asshole reading this thinks, “But you can deduct that from your taxes!”
I never understood this philosophy. Would you rather pay more money than less money to be able to get some of it back?
Granted, mortgage interest is tax-efficient (for now), but most of the money you pay in interest is unproductive. It does not matter. It’s the price you pay to be able to spend money you don’t have. And it’s expensive.
Interest paid for credit card loans, auto loans and student loans is non-performing. Who ever enjoyed the hundreds of thousands of dollars people pay in interest?
Think of all the things you could have bought with that money.
Nobody thinks about that.
The worst
Credit card debt is the worst. Of all the years I’ve had credit cards, only once have I had a month’s balance. I was just curious to see what would happen. I was charged $50 interest. Amusing.
There are people who have tens of thousands of dollars (or more) in credit card debt. They pay the monthly minimum, incurring hundreds of dollars in interest charges each month.
I don’t understand why anyone would limp under this crushing burden of debt and take no action.
Bankruptcy is obviously an option, but a better option is to implement some austerity, start saving money and reduce those credit card balances. You can reduce them to zero over time if you work on it.
Credit card debt should not be used at all. So if you have a balance, pay it off. If you have multiple balances, pay them all. You should pay them off before paying off your other debts because you are being breached by the interest rate.
You must act. Leaving those unopened bills on the counter doesn’t mean it’s all going to go away.
One last thing
The number one question I get as a financial writer is, “Why should I pay off my mortgage/car loan/credit cards?” I can make more than that on the stock market.
Uh, no, you can’t.
Even if the after-tax interest rate on your mortgage is below 3%, there’s no guarantee you’ll be able to beat it.
All you will have done is inflate your balance sheet, with lots of assets and lots of liabilities. Reduce the balance sheet. Make it smaller.
It’s a matter of security. Once you own your house/car/life free and clear, there is no better feeling in the world.
The stock market, represented by the S&P 500 SPX index,
may not behave. You can have drops of 10%, 20% or more in any given year. Then you will have debts and losses. Deal with the debt first. After that, start looking to make money in the stock market.
Freedom
Think about the thousands of dollars you spend paying debt service:
• Mortgage loan
• Car loan
• Credit card
• Student loan
Some of these debts are “better” than others, but they are all bad. Imagine getting rid of all of that and your income – all of that – turning into pure, free cash flow.
Is it possible?
Jared Dillian is a former head of ETF trading at Lehman Brothers. In one special reporthe writes about how to position your portfolio well for what he says is an upcoming stock market crash.
