Savings Investing Children Greed Miscellaneous Business Opportunities

INVESTING

Investing vs. Paying Off Debt

The housing prices in MANY parts of the world have been going through the roof in the last few years. They have been a great blessing to many people who already own a home; however, this has been a problem for those who don't own their own home. I feel that it has become a dangerous time here in the U.S. One of the reasons is the easy availability of credit. Interest only loans now account for over 30% of the overall mortgage market. If you don't know what interest only loans are, in a nutshell, it is a loan where you only pay interest on your home for a set time period (1-10 years) after which you will be paying interest and principle. Interest only loans lower your monthly payments so you can "afford" more house than you could have previously afforded, but it also can get you in big trouble.

For example, let's say a house 5 years ago was selling for $150,000. Today that house may be selling for $250,000 or a 66% increase in 5 years. Well, now I buy that house for $250,000 and get an interest only loan. And let's say that the real estate market starts to cool down and prices go down (after every big run up, there is a correction, whether that is the stock market, real estate, or any type of investment). Now, in a year, when the real estate market corrects, the value of my house went down 20% or $50,000 ($250,000 x 20%=$50,000). My home is now worth $200,000 but I owe $250,000 on it. So if I had to sell it, for whatever reason, I couldn't even pay the bank back what I owe them. I would still owe them $50,000 and have no house to live in. Now combine that with the fact that I have been paying interest, but I didn't even pay down the mortgage at all. And if, after the correction, real estate prices started to move back up a little bit a year, at 5% a year, it would still take me almost 5 years just to be back to where I started from. And with any type of investing, whether real estate, stock market , or any other investment, the markets usually take a good while to see their highs again after a big run up and a correction have occurred.

My point is don't borrow more money than you can afford and try to get out of debt ASAP. Don't extend your debt in hopes that your investments will go up.

I feel that, in the next 1-4 years, we will see more foreclosures in the United States than we have ever seen before. This is because of the factors that I have described. I hope that I am wrong, but I don't think that I will be. One of the reasons for this site is to help people get a handle on their finances. Finances have a role in so many aspects of our lives.

The only investment that is without risk is paying off your debt as described earlier.

We are to invest but not in haste or to get rich quick. We are to provide for our families as well.

1 Timothy 5:8 (ESV) But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.

Being debt free, INCLUDING your house, should be one of our financial goals.

How would it feel walking out to your mailbox everyday and KNOWING that you wouldn't find a bill for a mortgage, car loan, credit card, etc.? If you had no bills besides the daily expenses, wouldn't that free up more of your time to do the work for God's Kingdom that you want to do? You could work less at your job but work more for God's Kingdom.

Investing is good, but you need to invest in being debt free.

YOU CAN'T LIVE IN A STOCK OR IN A MUTUAL FUND.

Here is an example. Interest rates and exact figures will vary slightly, but for illustration purposes, it is important to see why it's better in the long run to pay off your debts prior to investing additional money (401K that are matched not included).

John Doe has a $200,000 mortgage at a 6.5% interest rate for 30 years. He pays a monthly house payment of $1,264. He also owes $8,000 in a car loan in which he pays $400 a month and has $9,500 in credit card bills in which he pays $200 a month.

John makes $1,000 a week or $52,000 a year or $4,333 each month. At the end of the month, John has $500 left over to do whatever he wants (of course he gave some to his church paid all his other bills, etc.). The $500 is a surplus left over after all things have been paid. So John decides to invest that $500 a month into the stock market for the next 30 years. Based on an annual return of 10% compounded annually, John, at the end of the 30 years would have $1,139,000. Wow, he is a millionaire! At the end of the 30 years, he finally is debt free and has made his last mortgage payment. He also has over $1.1 million in the stock market.

Now, what if John would have FIRST paid off his debt THEN invested? The scenario is the same. John still has the same $200,000 mortgage, still makes $52,000 a year, and still has $500 left over each month. So everything is EXACTLY the same EXCEPT that instead of taking that $500 and investing it in the stock market, he uses it to pay off his debt. First, John uses that extra $500 a month and puts it towards his car loan. After just 9 months of using his surplus $500 cash each month, his car loan is paid off. (He was already paying $400 a month towards the car loan, so instead he was paying $900 a month). Now after 9 months, John no longer has a car loan and has an additional $400 surplus each month on top of the $500 that he previously had. So with that $900 a month, John looks at paying down his credit card balance. Over the last 9 months, he has paid $200 a month on his credit card as that is what he owed each month. So his balance is around $8,000+. John now takes the $900 and adds it to the $200 that he is already paying to the credit card which makes it $1,100 a month to pay down his credit card. After a little over 7 more months, he has totally paid off his credit card.

So in the course of 16 months, John is now debt free EXCLUDING his mortgage and has a $1,100 a month surplus. John can now take that $1,100 surplus and pay down his mortgage. In about 9.5 more years of paying an additional $1,100 into his mortgage, his mortgage is completely paid off (11 years since the beginning).

So now John has the $1,100 surplus + the $1,264 monthly mortgage payment that he no longer pays because his house is PAID FOR. From the $2,364 a month surplus that he has now, he decides to invest it and gets the same 10% compounded that the previous example received. So instead of investing for 30 years, he only invests for 19 years at 10% annually for $2,364 a month. After 19 years, John has $1,611,000! Even though John had 11 less years to invest in this example, he still made almost $500,000 more than in the example where he just invested from the start. Not only that, but John has been debt free for 19 years! Talk about a lot less stress of being debt free for that long. You can't live in a stock/mutual fund; even if the stock market crashed, the John in the first example would still have a mortgage to pay. The John in the second example has been debt free so even if the market crashed, he still has a place to live and a much BIGGER surplus each month.

(Obviously this was a simple example. It didn't include all elements of interest rates, job changes, John's age, and many other things that can happen. But the John Doe who FIRST paid off his debt before investing turned out WAY ahead of the John who just invested and kept his debt. Calculations made available via finaid.org)

If you are interested in more information on paying off your mortgage without tying up all your money go to…

http://www.payyourmortgageoffnow.com/alleycat

GET OUT OF DEBT FIRST BEFORE HEAVILY INVESTING. IN THE LONG RUN, YOU WILL DO MUCH BETTER. PLUS, YOU WILL HAVE A LOT LESS STRESS WHEN YOU ARE DEBT FREE. And I can't say this enough, YOU CAN'T LIVE IN A STOCK/MUTUAL FUND/401K. Having your house paid for will help to keep your stress level much lower. You never know if something will happen to you or your spouse or if you will become unable to work.

If you do like to invest in Stocks we also have a Stock Doubling newsletter that is FREE It can be found at

http://www.StockDoubling.com

Sign up for our FREE Newsletter you will receive an email once a month on additional ways to save and make $$$.

Thank you

Steve Hoven
alleycatnews@aol.com

PLEASE REFER YOUR FRIENDS TO THIS SITE
IF YOU THINK IT HAS BEEN HELPFUL TO YOU.

www.500bucksback.com