Why You Should Pay Off Your House and Not Listen to Your Accountant
First, the accountants argument is this - "You should never pay off your house because you can take the money and invest it."
What the accountant means is this -
You pay around 5-6% on your mortgage. (Let's say 6%)
You have $90,000 left on your mortgage and $90,000 in cash ready to pay it off.
The accountant says you should invest it in a mutual fund. (Mutual funds typically earn 12% a year - historically)
So the accountant says - "Hey, you earn 6% a year on your money!" (He means after you deduct the 6% a year mortgage)
Sounds good right? It does when you think of it like that but the ridiculous account isn't thinking of two big important factors.
Look at it like this - you invest in a mutual fund and expect to earn 12% on a 90,000 investment right? What about taxes? Now it looks more like 9%. Then you need to factor in risk. (Risk? Yeah, in a mutual fund there is risk of losing your money) How I factor it in? Well I always deduct 2.5% on investment under a 10% expected return. So, now that fabulous 12% is looking more like 6.5%. It is basically a wash. You are not making anything on your "investment".
So, at this point an account may say something stupid like the following -
"Yeah, but what if you get 20% return on your investment" Then you have to think to yourself "Hmmm..If I had my house paid for, would I borrow $90,000 against my house to invest in a POSSIBLE 20% return on an investment? Of course not. If you have an accountant that tells you to never pay off your house....what are you going to do then? Would you let a person handle your money after knowing he can't understand what a 10 year old kid can?
I wouldn't ever do business with anyone who didn't believe the way I do. Whether or not you agree with the above explanation, you should make sure that you and your account share the same beliefs. When you trust someone enough to handle your money, it's best to be on the same page.
Published by Nick Brown
I work as an advertising and marketing executive for a TV Network (affiliate). I also make money on the side by shooting and editing film and video. I also develop company strategies and buy and sell real... View profile
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2 Comments
Post a CommentThe comment posted by VB is someone who heard the word "Arbitrary" a few days a go and is dying to use it in a sentence. People are frustrating.....
Many flaws in the article: The deduction of 2.5% under 10% expected return is arbitrary at best. where did you come up with this rule? the risk is there but doesn't mean you make arbitrary calculation. Also, the way you went slashing return on investment for taxes you should adjust mortgage rate also for tax benefits. Using the same tax rate the 6% loan now looks more like a 4.5% loan ... so 6.5% return on investment (after tax and your arbitrary risk adjustment) looks a lot better now ... doesn't it?!