Pay Down the I have 100k to invest or Invest More? There’s a thoughtful debate going on right now over in the Money Mustache Forum, where people are comparing different strategies for investing in rental houses. Some people prefer to save up the full purchase price of a house before plunging in and making the move.
Others will make the buy using a mortgage but then pay down the principal as aggressively as possible. That’s a landlord-specific example, and not all of us are interested in owning rental houses. But exactly the same thought process goes into deciding whether you should pay off your mortgage as quickly as possible, or pump your surplus cash into stocks and other investments on the theory that the long-term return of stocks is better than the 3. US and Canadian mortgages are currently charging. It’s a complicated question, because to fully answer it you’d need to consider risk, your personality type, how close you are to retirement, asset valuation and cashflow, and even make a stab at predicting the future. YOU putting away money in a productive place, which will tend to make you wealthier over time. But just for fun, let’s consider a few different scenarios to compare the effects of payoff and leveraging.
Some of my less Mustachian acquaintances like to talk confidently about the benefits of borrowing money. I am never paying down my mortgage, I’ll just use my money to make more money! This statement is correct in general, but the problem is that it is often used to justify higher consumer spending rather than higher investment. But their investment accounts are smaller than even the value of the material things they have bought. To justify not paying off your mortgage, you have to demonstrate a genuine desire to get ahead through investment. One of the moderators of the MMM forum is a guy named Joe. He’s a fast-thinking, voraciously-reading, fast-typing type of guy who is on the rocket path to financial independence.
He correctly calculates that you can make money MUCH faster when you carry a mortgage balance on your rental houses rather than buy them entirely in cash. Let’s say houses cost 100k each, and you have 100k to invest. Mustachian landlords can easily beat this performance, but for now let’s go with it. Already you’re making an extra 2 grand per year. But wait, we are also paying down that mortgage. 76 that you gain in equity.