Thursday, October 31, 2019

Does paying off a mortgage beat investing in stocks?

In the last example, I ran some numbers in order to determine if it was better to pay off my mortgage early or to invest the money and use the capital to make the mortgage payments.

After going through the examples, I received a lot of feedback from readers. Turns out I made an error. The best response came from reader Keith S., who is CPA. This is what I heard from him:

Hi Dividend Growth Investor:

I just read your article about paying off mortgage vs investing.

As you state, if the mortgage is 4% and the investment is 10%, not paying the mortgage down should be best.

The problem is your spreadsheet.

Option 1 Pay down the mortgage.

You are now assuming you take $11,460 per year that you would have paid on the mortgage and invested it. After 30 years, we have $1,885,101 invested in equities and a fully paid for house. 

Option 2 Put $200,000 in side fund.

In this case, you still would be making the $11,460 in mortgage payments (not taking them out of the side fund). Otherwise, option 1 would be taking $11460 out of pocket each year while option 2 would not be taking anything out of pocket).

So after 30 years, option 2 the mortgage is paid off and the side fund has grown to

$200,000 compounded at 10% for 30 years= $3,489,880

So, in fact, leaving the money in the side fund is much better by over $1.5 million.

Hope that helps

Plenty of other readers commented, showing the issues. I have a great community of sharp readers, who can spot inconsistencies, and take advantage of them.

You can view the spreadsheet with calculations from here.

The moral of the story is that you should always be skeptical of everything you read on the internet. You should trust, but also verify the numbers. This goes without saying, but you should really double-check numbers, assumptions, and logic when excel spreadsheets are involved. If someone is making a statement, you should always try to verify using data and trying to make an objective analysis to evaluate the date.

This process applies equally to content and analysis done by people you agree with or disagree with. Everyone can make an error, which is why it makes sense to double check your work, before making any actionable changes. It is also great to receive feedback, as it can help grow.

Last but not least, it is important to have an open mind. If you make an error, admit it, and learn from it. In my case, I have made lots of errors over time. However, I have tried to be open about it, and see it as a learning opportunity. If you keep learning, you keep growing, so hopefully your investment portfolio will show improved performance over time.

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