What would you do with $100,000? - Posted by GG

import · May 2, 2003, 1:52am

Re: Never, never, never… - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on May 02, 2003 at 01:52:22:

Jeff Sullivan------------------

I’m in agreement with Andrew and JT(IN) on this one.

You can separate the financial decision-making into two components, the economic and the emotional. What you are saying makes sense emotionally to a lot of people. But, as was pointed out, economically it is a stupid idea.

I’d suggest that anybody who is about to let his/her emotions control financial decisions to do some cogitation about the emotions. Where are they coming from? What are the scenarios that are being conjured up to lead to the emotions? How realistic are they? Could they be looked at in different ways? Could there be some ways to ameliorate the anticipated terrible things that might happen? Prevent them? I suspect that with some insight, one might find that it is better to make the economically correct decisions rather than emotional ones.

For instance, having one’s home loan paid off early so as not to worry about what? Foreclosure, I suppose. Well, if, in the early years of the home mortgage, suppose you had put to work the money that you were planning to use to pay down the home loan early? You invested it in some properties that had either good cash flow, appreciation, or both. And had some tax benefits also. So, when a few years later you are facing the situation where you might have a foreclosure on your personal residence, what might you do? Well, you have cashflow from the rentals to pay the mortgage–no sweat. Or, you have a lot of equity in the properties and can borrow out money–tax free–to pay the home loan. With the renters paying off the new rental property mortgage.

Meanwhile, the tax savings from the rental properties means that you have more money after taxes than you would have had if you had not had the rentals because you were paying off your home loan early. If you are frugal, you are saving this added after-tax income and, when it gets big enough, used it to buy still more rental properties. Which are helpful, as are the other rentals, in paying the home loan that you are fearful of having foreclosed upon you.

No, paying off the home loan does early does not make economic sense. And, if you do some analysis such as the above, it does not make sense from an emotional standpoint either.

So why do I pay off an extra $8.53 a month on my $900+ home mortgage? Well, it rounds the check up to the next nearest ten dollars. Is that enough reason? Hmmm. Maybe I’m a bit inconsistent here. Let’s see, save the $8.53 a month for how long to be able to buy a house in Oklahoma? About 300 months. Gee, I guess the theory applies only when we are talking about bigger amounts of money.

So, ok, as long as you pay off no more than $25 a month extra, go ahead and pay down that home loan faster. How does that sound for a comprommise?

Good Investing********Ron Starr****************

import · May 1, 2003, 4:48pm

Re: Never, never, never… - Posted by JT-IN

Posted by JT-IN on May 01, 2003 at 16:48:50:

Jeff:

“for every dollar you pay for principal in the life of a mortgage, you pay two dollars in interest”

The idea is… while you are paying three dollars on a mtg, you are making six dollars with the funds invested elsewhere. One of the elementary principles of RE investing.

JT-IN

import · May 1, 2003, 11:43am

Re: Never, never, never… - Posted by Andrew

Posted by Andrew on May 01, 2003 at 11:43:06:

Hi Jeff,

I understand the security arguments for debt free living and think it is a very good idea for most people (i.e. non-investors) to avoid debt in general.

However, it’s probably not very productive for an investor that can use that money for other opportunities. I mean, if we can’t do better than the return realized from paying down a tax deductible 6% mortgage, then what kind of an investors are we?

So the answer to “Why pay it (mortgage interest) if you don’t have to???” is because as an investor I can make a much higher return.

Just my 2 cents… keep the change!

-Andrew

import · May 1, 2003, 8:47am

I agree with this idea to a point… - Posted by JT-IN

Posted by JT-IN on May 01, 2003 at 08:47:18:

Ron:

The caveat here is that many times folks do not possess the financial discipline to maintain sufficient credit availability to provide enough liquidity to accomplish the goal. So bottom line is that this method will work great if the personality matches task. If not, then there is nothing that replaces 10K to 20K sitting in a money mkt acct. Although, if a person does not possess the discipline to maintain the requisite credit limits, then they will surely have an issue leaving their hands off of the money mkt funds… So from the standpoint of what is recommended, I am hard pressed to recommend that someone use a credit line (credit card) for emmergency funds, w/o knowing their psychological capacity.

It all boils down to personal restraint, which is a fleeting commodity in the year 2003, it seems. In summary, your point does make sense to you and I… as to practicality, it varies from household to household.

Just the way that I view things…

JT-IN

PS. I think that it is a good practice for oneself to learn to have funds lying around, (mm accts, cash, etc.), and learn to leave your hands off of them. A few years ago, my son at the age of 24, had a particularly difficult time hanging onto cash in pocket. So old Dad, in his strange ways, devised a little challenge for him. I handed him 5 $ 100 dollar bills, on the basis that he had to keep the same 5 $ 100 bills on his person, or within reach of his person at all times of the day or night; subject to audit by Dad. The serial numbers were recorded so not even one of them would be able to be used for a Big Mac attack, without violating the terms of the challenge. So the deal was that if he was able to keep these bills in his possession for 45 days, without as much as cashing one of them or ever being out of reach of them for that time period, then he would inherit full control of them on day 46, to with as he pleased. If he was unsuccessful, he would owe me 6 - $ 100 bills. The whole intent was to teach him restraint of having something of value and not immediately convert it, as the CHEMIST would. Well, he did keep all 5 of them for the 45 days, but I can’t say that he had much of any of them a few weeks after having full control of the $ 500. It has had not alteration of his habits since, either… His loss…