My wife has often suggested that we pay extra towards our mortgage to payoff our mortgage early. But is that a good idea? When making the decision, there are two sides.
On one side, you can payoff the mortgage early, and be free from the debt that much earlier.
On the other side, you can use that money that you would have used for the early mortgage payoff, and invest it for a greater return in the long run.
Our mortgage interest rate is something like 5.75% fixed for 25 years. Plus the interest on the loan is tax deductable. So if you take that into account, the interest rate is like less than 4.5%. If we invest that extra money into the stock market which has averaged over 10% for the long term, we are coming out ahead! It’s kind of like Uncle Sam is loaning us money that we can invest.
The second option only works if you actually invest the money, and don’t just spend it on junk. Currently, I am maxing out my 401k, and my Roth IRA, and my wife’s Roth IRA. She is also putting money into her 401k plan, and we will soon be bumping that up. So are we blowing the extra money? I don’t think so.
Be aware that if you choose the early mortgage payoff option, that you make sure the bank knows to apply the extra money towards the principal. Otherwise they may apply it all towards the towards the interest. Or worse, they may shove it into some low interest account where it sits doing nothing.
Before we talk about tax diversification, lets talk about diversification in general. Diversification in investing is a good thing. If you invest your money too narrowly, you take on too much risk. For example if you invest in a single company and that company goes out of business, you will lose all of your money. Even investing in single sectors is too narrow, as sectors go in and out of favor. So you want to invest your money across a variety on sectors and companies.
Another type of diversification is time diversification. The market as a whole tends to rise and fall. If you invest your money all at once you risk investing at a high point. But if you invest in increments over time, you will invest some at the high points, but also some at the low points. If you are investing equal dollar amounts, you will buy more shares at lower prices, and fewer shares at higher prices. This is called dollar cost averaging.
Now let’s look at tax diversification. What is it? Tax diversification is the idea that when investing money in tax-deferred accounts, you invest some in pre-tax accounts, and some in post-tax accounts. The creation of the Roth IRA helped make this possible.
Previously, there were pre-tax types such as 401k and traditional IRA. You were able to invest your money before the taxes were taken out. Your money would compound tax-free until you took the money out. Then you would have to pay taxes on the money as ordinary income.
But with the Roth IRA, and the new Roth 401k, you invest the money after the taxes have been taken out. You will have less to invest. But now that money goes on to compound tax-free. Then when you reach the age of 59 1/2, you can start taking the money out without having to pay a dine in taxes!
So is why is tax diversification good? Because tax rates fluctuate. You don’t know if the tax rates will be better know, or when you retire. So why gamble? Invest money in both pre-tax and post-tax types of retirement accounts.
The Millionaire Mind by Thomas J. Stanley is a continuation of The Millionaire Next Door by Thomas J. Stanley and William D. Danko.
Dr. Stanley interviewed another 1,371 millionaires.
What is the millionaire mind?
92% are married and have been with their first wife for an average 28 years. They live well below their means. They are home owners, not renters. 40% have paid off their mortgage. ONLY 10% live in homes that were built in the last 10 years. They also tend to buy homes when others are selling. Less than 2% have inherited wealth. Over 90% are college graduates. Most are not in the top of their class, but average “B” or “C” students. The average millionaire had a lowly 2.92 GPA. The average SAT scores were between 1100 and 1190. Few scored 1400 or higher on their SATs. They avoid the lottery and gambling, and enjoy spending most of their time with their family or playing a game of golf with friends. 37% are deeply religious people who attend church regularly. Integrity in business is their number one priority. They pay most of the income taxes in this country! Vocations are not work, but a labor of love. 32% are business owners. 16% are senior executives. 10% are attorneys and 9% are physicians. Business owners overall are the richest of the group. “Discipline 101 and Tenacity 102″ made them rich.
This is an excellent book, buut you will probably want to read The Millionaire Next Door before you read The Millionaire Mind.
The Millionaire Next Door by Thomas J. Stanley and William D. Danko. The authors set out to find out who the wealthy are. They spent 20 years interviewing millionaires. And in most cases, they are not who you think they are. That guy with the expensive car, and big house may not be as wealthy as you think. There is a good chance that he doesn’t actually have much in the way acculated wealth. He may be in debt up to his eyeballs. It could however be the guy driving the plain car and living an average size house that actually has the ten million dollar bank account. This book will tell you who the rich are and who they are not. This book will tell you habits of the wealthy and how they got to be that way. If you model your habits after some of these people, it will go a long way to helping you to become rich.
How can you join the ranks of America’s wealthy (defined as people whose net worth is over one million dollars)? It’s easy, say doctors Stanley and Danko, who have spent the last 20 years interviewing members of this elite club: you just have to follow seven simple rules. The first rule is, always live well below your means. The last rule is, choose your occupation wisely. You’ll have to buy the book to find out the other five. It’s only fair. The authors’ conclusions are commonsensical. But, as they point out, their prescription often flies in the face of what we think wealthy people should do. There are no pop stars or athletes in this book, but plenty of wall-board manufacturers–particularly ones who take cheap, infrequent vacations! Stanley and Danko mercilessly show how wealth takes sacrifice, discipline, and hard work, qualities that are positively discouraged by our high-consumption society. “You aren’t what you drive,” admonish the authors. Somewhere, Benjamin Franklin is smiling.
I love going to investing seminars. Especially free investing seminars! Why would an investing seminar be free? Because they are trying to sell you something…why else would it be free? But I have never actually bought anything at any of the seminars. I still have still gained knowledge and information. They talk about various things that they do, and usually offer another paid seminar in which they will give you more information. But once I have learned a little about what they do, I can go and do my own research, and decide if it is something that I want to pursue.
I think the first investing seminar I went to was for Wade Cook investment network, or whatever they were calling themselves.
One of my favorite investing seminars was the Millionaires Conference which had half a dozen speakers including William Danko (co-author of The Millionaire Next Door). I learned a lot at that seminar, and it didn’t cost me a penny. In fact, I got a free book out of it.
But beyond investing information, I love seeing the structure of the seminars, and how they go about trying to sell to the audience. I find it entertaining. They usually offer the paid seminar for some lofty price ($3000-$5000), and then lower it for those at the seminar ($1000-$3000). Some of the presenters are very good. I really appreciate dynamic speakers. I love the little tricks they use to get the audience involved, like asking rhetorical questions like “who here wants to be rich?”, and then having people hold up their hands. Obviously everyone there wants to be rich. Then they begin to tell you that only their product will make you rich, and that if you don’t buy their product, you will never be rich, etc. It is really fascinating to watch these guys work.
The invites to the investing seminars using come in the mail. If you get on the right mailing list, they will come. And if you have gone to one seminar, your name might end up on a list, and you might get invited to other seminars. The last seminar I attended, I heard about on an infomercial. I just went to their website and signed up.
If you have nothing better to do, go check one of these things out. If you are concerned that you might get talked into buying something that you shouldn’t, then leave your credit cards at home.