Where to Invest Money
Before I explain why I believe it is important to pay off your home mortgage as soon as you can, I want to give the disclaimer. I believe the most important investment you can make is in yourself.
Your wealth is nothing without your health. You must take time to learn because applied knowledge is power.
With that said I want to tell you about an event that I witnessed at my work. Why I believe the customer was told to invest money, they had been saving, into a bad investment strategy.
The Bad Advise
Recently, I was referred a customer, by one of my fellow co-workers. This customer wanted to apply $60,000 from his checking account as a principal payment towards the balance of his mortgage.
Putting the money towards the principal of the mortgage would not only decrease the amount of time it would take him to pay off his mortgage but it would save his thousands in interest.
Unfortunately, I had to pass the appointment to one of my colleagues. But I sat in on a meeting. The whole time I listened to the advice given to the customer I tried to finds ways to understand the customers advantage.
The advice was not for the customers benefit. The conversation was in the favour of the banking associate and ultimately in the benefit of the bank.
The breakdown of events
My opinion is that the customer should lower his outstanding mortgage amount for long-term gain verses the advice he was told and ultimately took because of bad guidance.
I will use simple math to explain my position. This will help you understand why I believe paying down your mortgage is a better idea than investing in mutual funds.
If the bi-weekly payment on your mortgage is $1000 then this means you would be making the equivalent of 60 bi-weekly payments as principle on the original mortgage amount
This mean you would pay down the mortgage 30 months (2.5 years) faster than the original amortization period agreed upon. This is where the money in interested is saved by the customer.
How the Money Conversation Went
The customer comes in to the bank and said he would like to put $60,000 on the principal of his mortgage. By doing this he would still have $20,000 remaining in his savings and about $5,000 in his checking account.
This would leave him enough for an emergencies and any day to day transactions.
Instead, of having the transaction completed to his request, the customer is told he would not benefit if he invest money towards his mortgage.
He is told there is a better option. That option is to invest all of the money and let that money work for him.
The customer is advised to put $6,000 of the total $85,000 towards his Line of Credit and pay it off. This leaves him $79,000.
Although I don’t really mind this suggestion because a line of credit’s interest rate can be between 7-13%. The problem with this is the customer does not know how to manage his expenses.
Most likely he will have a line of credit balance of $6000 or more within the next 12 to 15 months. He will be back to paying anywhere between 7-13% in interest on his loan, as long as the prime rate does not go up.
Then the customer is told to take $20,000 out of savings and put that money towards the principal payment of his mortgage. This now leaves him $59,000.
Continuing with the example from above, this would be 20 bi-weekly payments or 10 months’ worth of payments instead of 60 payments and 2.5 years.
Next the customer is told to leave $5,000 in his savings and $5,000 in his checking.
The rest, $49,000, should be invested in mutual funds. The reason is because historical date shows that mutual funds have performed at 7% over the last 10 year.
The Markets in 2018
Historical data is just that. It is a past indication of the funds’ performance. In no way is the pasts performance an indication of how the fund will do in the future!
This is a sales tactic! There are too many variables when investing in the markets.
Anyone paying attention to the financial markets can see that the stock market is going down. In 2018, this has been the case because many of the major technology or social media companies have seen decreases in the value of their stocks.
The so called FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) have not been performing as of late. Really the only one showing growth is Amazon as online sales continue to increase.
With the trade tensions between United States of America and China the market has been a decline as a whole. Prices are going up and consumers are changing purchasing habits.
As you can guess, none of this simple information about the market is mentioned to the customer.
Instead, the customer is being told to invest his hard earned money in a losing market. The banks will continue to takes their fees from the total amount you invest. They will also continue to post record profits from quarter to quarter, in the billions!
To insure the mutual fund yields returns, the customer is told to leave the money in the investment fund for at least 5 years. Then the customer will start to see results he can be proud of the longer the money stays invested.
Why would you ever invest in a mutual fund versus paying down your mortgage? To me this makes no sense and I will try to explain way using simple math.
Let’s say the mutual fund the bank invests in does well. Let’s also assume the fund will pay out 7% per year and does not have a down over the next 5 years (starting January 1, 2019).
This means the market is in an upward trend headed into a bull market. Which we can see it is currently headed towards a bear market in some sectors.
You can invest $49,000 and earn 7% interest. This would give you a total of $3,430. Calculating simple interest, over the next 5 years the customer would yield a total of $17,150.
Although unlikely, if this were to happen this would not be a bad investment. But we all know this is too good to be true. Right?
In order to explain why a mortgage payment is a better idea, I need to give a few numbers. First, let’s assume the mortgage balance is $500,000 CND with an amortization period of 22 years remaining.
This is close to my customers example.
Second, let’s assume the interest rate of the mortgage is 2.5% fixed. Lastly, we will assume the customer puts down $60,000 as originally discussed.
With these variables, the bi-weekly payments would be about $2000 a month. Of the bi-weekly payments of $1000 would go towards principal and $1000 would go to interest.
That means over the next 30 months, $30000 would be going to interest alone. All the interest goes to the bank remember? They are the one who lend you the money to purchase your home.
This means you would save $30,000 in interest payments by making a lump sum contribution. This would happen because the mortgage would be paid off 2.5 years faster.
Not only did you save $30,000, you now get to keep the $60,000 in payments that you would be making in the last 30 months of your mortgage amortization period!
You have the potential to lose your money in mutual funds. You also can make somewhere in the neighbourhood of $1 to $17,150 in a 5 year period.
The faster you pay down and off your mortgage, the soon you can start to save the additional $2,000 a month that is being paid to the bank.
In the end it is your choice how you want your money working for you.
What would you do? Are you going to pay down your mortgage, assuming you have one, or gamble in mutual funds?
Please leave a comment below and let others know what you plan on doing? This will encourage other to make better choices with their money.
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Founder and CEO, Discover Your Life Today
Maveen has built his career in Banking, Insurance, Home and Automobile Sales. Providing exceptional customer service is his passion. Writing is a way to share his knowledge and help change the lives of million of people. Like the Facebook Page to support him.