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Increase
your assets by saving and investing
The
very best strategy to increase your assets is to maximize your 401(k),
allowable IRA, or other tax sheltered retirement accounts, because
every dollar you put in is pretax and gets to earn money tax-free.
If you are in the 36% tax bracket, you are earning 36% automatically,
plus the 7.5% you'd have to pay in social security taxes (a total
of 43.5%). This is even more critical if your employer matches any
part of your 401(k) contribution. You earn 50% to 100% on your money
before any investment return begins.
Assuming
you have paid off all your consumer debt and have maximized your
401(k), allowable IRA contributions, or other tax-sheltered retirement
accounts, if you have additional money you want to save, you now
have two options:
1) Use the extra cash to pay down your mortgage.
2) Use the extra cash to buy investments in a regular, taxable
account.
The
choice depends upon what investments you'd buy. If you would buy:
a)
Stocks: Historically, stocks have yielded a lot higher that the
8% (for example) return you'd get on your money by paying down
an 8% mortgage. (For a risk-taker, a mortgage is a low cost, tax
deductible loan that allows you to have money to invest or keep
invested.)
b)
Bonds or CDs: If the choice is between paying down an 8% mortgage
and buying a bond or CD with a 6% yield, the choice should probably
be the mortgage pay down. Paying the mortgage down means you'll
be paying interest for fewer years, a guaranteed savings that
bets the after tax rate of return on many investments including
government bonds. This is a sure thing.
The Mortgage
Pay Down
Even
small extra monthly payments make a big difference. For example:
On
a $200,000 30-year loan at 7.5% with a $1,400 monthly payment, adding
$25 extra to each check or $8,425 over the life of the loan, you
would save $22,000 in interest and pay off the mortgage almost 2
years early.
On
an ARM, the extra $25 won't shorten the term of the loan but the
additional dollars will lead to lower required monthly payment
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