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Building
Wealth
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:
- Use the extra cash to pay down your mortgage.
- 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:
- 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.)
- 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.
Cherry Creek Mortgage
4301 Hacienda Dr. Ste. 120
Pleasanton, CA. 94588
Phone 800-325-2062
Fax 925-520-0231
