Are You Engaged In Risky Behaviour
An Open Letter On Financial Planning
Here is a copy of a recent email that I received…
Me and my husband enjoy reading your columns. Recently we read
“The Top 10 Myths of Canadian Home Ownership-Exposed” and send it to our accountant.
Below is a response.
What would be your comment on it?
The accountants response
*Without trying to comment on each point in there I think these things are more of just a sales pitch. I think they are full of half truths to get you to buy investments.
Here’s a couple of principles which I believe are true.
You will never go wrong in paying off your mortgage quicker. If your mortgage rate is say 5% then depending on your tax rate that can equate to say a 7or 8% before tax interest rate .. Therefore every dollar you pay off on your mortgage saves you 7 to 8% before tax which is guaranteed. Show me an investment that will pay you a 7 to 8% guaranteed rate of return, I doubt there are many out there. The problem is you do not really see it as no one sends you a statement each month showing this is what you would have paid but that does not change the fact that saving money is the same as earning money.
If you have investments (outside of RSP’s) and a mortgage then using the investments to pay down your mortgage and borrowing it back to reinvest can allow you then to deduct your mortgage interest or a part of it for taxes. Obviously that is a preferable situation.
Similarly if you have equity in your home then you can take it out in the form of a loan and invest it and make that part of the interest deductible.
I saw several clients doing this in the 90’s with the bull markets and dot com’s but as the bubble burst and markets weakened a lot of them abandoned that strategy.
Leveraging your investments is not for the faint of heart and needs to be a long term strategy with sound investments that produce a rate of return over time greater than the interest cost on the loan.
Right now with the market volatility and a bear market I am not sure I would be comfortable with this.
That said now is likely a good time to invest with values depressed but I am not sure I would want to leverage my home to do it. **
Should you pay off your mortgage or do RRSP’s. There is no answer to that as it depends on a host of variables which are constantly changing, but the spread between the rate of return on your RSP’ and the mortgage rate seems to drive the answer.
Short term right now I would likely favor paying down my mortgage but I always tried to do both and again I do not think you will regret doing either.
Hope this helps but if you have specific questions let me know.*
Now, here is my response…
Dear Mrs. Curious:
Delighted to hear from you!
I am pleased that you took the time to not only read my philosophy in “The Top 10 Myths of Canadian Home Ownership-Exposed” http://howtogetridofyourmortgage.com/FreeReport/
but also impressed by your initiative to forward it along to your accountant for comment!
I originally began writing to address each of your accountants comments above – however, it them morphed into “the big picture” context – still, I believe that you will find it “on point”.
The reason I write and endeavor to articulate my philosophy is because of having over 22 years of experience in the financial services industry I see more and more clearly what works – and what does not work.
I fully believe and practice by the philosophy “that if I know something and don’t share it with you I am morally and ethically at fault”.
Therefore, what I endeavor to do is challenge the cherished beliefs that most Canadians have about their mortgage, debt and finances…much of which has been handed down to them by their parents and theirs before them.
These well intentioned individuals have had no exposure or training in economics, finance and behavioral science. (These are the same individuals who when candid with me have told me “I wish I had met you 10, 20 years ago”…)
However, I digress…
Should you always pay off your home as fast as possible to save interest?
This is THE major question that Canadians are confronted and wrestle with.
How they answer it and how they ACT will have major consequences for the remainder of their lives.
For the majority of Canadians, paying off their mortgage as quickly as possible is their major goal.
They maintain that it will give them a sense of security and peace of mind.
Frankly, in my opinion it is this kind of belief that it totally wrong and befits the classic definition of financial dysfunction: financial strategies that people think are effective but actually block their financial progress.
Look at the image below.
Which Is Riskier?
Which one is riskier?
Is it the one who has the home fully paid off and a small amount of investments.
Is it the one that has not yet paid off their home – but has substantial investments outside of it.
Which one would you really truly wish for?
Be honest with yourself.
Now, are you on the path that will make it happen for you?
As the figure above illustrates it is actually much riskier from an asset allocation standpoint to have a home fully paid off and few other assets.
(Any advisor worth “their salt” will tell you that having over 60% of your assets in any one asset class means that you are betting – not investing.)
As opposed to having a mortgage AND a more balanced investment portfolio.
First of all, lack of diversification (having to many eggs in one basket) can be devastating – especially if real estate values drop. The lack of liquidity (quick access to cash) can be both stressful and traumatic…
Bear in mind that if you are disabled or unemployed for any length of time the bank is not likely to be willing to loan money on your home – or help you get your money (equity) out!
Read my article: Lisa And Lori And Your Mortgage
The picture below comically but dramatically illustrates what I see all to often…here is an individual who owns his home and land outright – but must live in poverty because he has no money.
But My Home Is Paid Off!
Sound like anyone you know?
I see this on a regular basis!
The example above reinforces what I have been stating for some time now.
Do you know what it is?
Don’t tie up all your financial resources in your home!
I believe, that because a house lasts longer than a mortgage, paying off your home as quickly as possible may not be the best use of your money.
For some strange reason, many people think that saving money and making money to be one in the same.
They are not the same at all.
In fact, they are two completely different animals!
A critical point that you must be aware of and clearly understand right now if you are ever to generate true wealth is:
Nobody ever got rich by saving money!
Read my article: Savers Are Losers
Paying off debt is not the same as accumulating assets!
You will never create true wealth on the money you save! You will only create true and lasting wealth on the money your money MAKES for you – on the money you save!
All to often I hear people, (such as your accountant say), well, you will never go wrong in paying off your mortgage quicker…
In fact, they then go on to say that if the mortgage rate is say 5% then depending on your tax rate that can equate to say a 7or 8% before tax interest rate.
Therefore every dollar you pay off on your mortgage saves you 7 to 8% before tax “which is guaranteed”.
They then say, show me an investment that will pay you a 7 to 8% guaranteed rate of return.
Of course, we all agree that there are no investments out there that will pay you a 7 to 8% guaranteed rate of return – including your home!
Of course, they then grudgingly submit that the problem is you do not really see “the savings” as no one sends you a statement each month showing this is what you would have paid…but in the next breath they still say: “but that does not change the fact that saving money is the same as earning money”.
To this I say, paying off debt is not the same as accumulating assets!
Going back to our example above of the $100 a month going to pay down the mortgage – does this use of your hard earned money increase the resale value of our home by 7-8%?
Of course not!
That money is gone!
Never to be seen again…
The “return” we will see on our property (irrespective of whether or not we paid down our mortgage a bit more in the year) will be determined only by local property values and supply and demand that will occur during the year…
Pre paying mortgages has no bearing on the “current market value” of our home or its future re sale potential…
Now, don’t get me wrong – I am all for paying off a mortgage early – however, I suggest considering an alternate methodology of achieving this.
I believe that one should manage their equity in their home – as well as outside of their home…
One that builds up equity outside the home.
One that creates access to investments that are liquid (easily accessible and/or cashable).
One that creates tax relief.
Over the past 70 years the American stock market index has delivered an average of 11% per year.
Not so with real estate – its done 6-7%!
Now, investing $100 a month and achieving the historical rate of the American stock markets (11%) per year would net almost $40,000 after taxes in 15 years.
Paying a $100 a month extra towards your mortgage (assuming a 6% interest rate) would save less than $30,000 over 15 years. (Would you have captured these “savings” for an investment program or at least put the money into a savings account? If so how?)
In fact, by investing the money instead of paying down the mortgage, after 15 years, you could pay down the mortgage to where it would have been if you applied $100 a month to the principal.
Plus the investment would give you over $10,000 more!
In fact you could take this a step further and borrow a small amount of money and use the $100 a month to service an “interest only” loan. Assuming interest costs of 7% your $17,000 loan would cost you $100 per month.
The interest is tax deductible (because you have borrowed to invest) and after 15 years – after the loan is fully paid off you would still have after taxes – $48,000!
So, by “borrowing to invest” instead of paying down the mortgage, after 15 years you could pay down the mortgage to where it would have been if you applied $100 a month to the principal and still have $18,000 left over!
However, over the same 15 year period while your home was also appreciating in value – irrespective as to how you were dealing with your mortgage – you would have also enjoyed “liquidity” in the investments held outside of your home in the form of your portfolio (that could be accessed for emergencies and opportunities along the way) as well as the tax relief afforded you on the loan interest cost.
Every dollar you hand to the bank is a dollar that you did not save or invest!
Just because you may “save” thousands of dollars by paying off you mortgage early you have not taken these “savings” and invested them.
You will have spent all or most of those “saved” dollars by having more disposable income that is now being spent on trips, newer cars, a nicer lifestyle (almost being able to afford keeping up with “the Jonses”) etc.
I have never seen people that have “saved” mortgage interest – invest!
First off, there is no money to be had from paying down their mortgage – their just paying down debt – the moneys gone!
Now, once the mortgage is paid off, with that money (if they were to use it all – and they don’t, let me assure you) for starters, they will be years behind the eight ball and time is now their enemy – not their friend – in the wealth accumulation game.
Furthermore, I take offense to the suggestion that my commentary is nothing more than a thinly disguised sales pitch for investments.
There could be nothing further from the truth.
I want people to become wealthy!
I want to be able to take them from where they are to where they want to be.
I want them to be all that they can become!
That is the focus of my practice!
But why is there such a large “middle class” as opposed to the wealthy?
Because the “middle class” are all thinking the same thoughts and doing things the same old way that they have been taught to do and conditioned to do by their family, friends and well meaning “others”…
The wealthy on the other hand are that way because they think differently!
They think and ACT “outside the box”!
It is this fundamental concept that I am trying to convey in all of my writings, videos and audios…
If there was another way – a better way – I would be just as passionate about letting you know about it.
However, in my opinion there is not!
Real wealth is created through the power of leverage!
Real wealth is created through the power of using other peoples money – OPM.
This is what the wealthy do!
Read my article: Wealthy Pulling Ahead
However, as “middle class” we all do the same thing to get into the housing market.
We use “leverage”!
It’s a no brainer!
We fall in love with a home, borrow a ton of money to be able to move into the home – and then pay a ton of money to pay off the mortgage that made it all possible…
Read And Weep
On the “flip side” can you imagine how long it would take us to save to pay cash for our homes – years, if ever.
Moreover, whether we pay cash or have a mortgage – our home is appreciating and creating wealth for us – literally as we sleep!
And if we want to – we can do the same again and again.
Only this time we can do it with rental properties, stocks, bonds and the like.
Now these asset classes are somewhat different in nature than real estate and that is why many shy away from them or indeed have bad experiences with them.
Because when they ventured into these other areas and investments they generally tried to do things themselves or were acting on “hot stock tips” (betting), etc.
They based their investment decisions on “fear and greed”. (Successful investors keep their emotions in check and/or assisted by their advisors to do so…)
The Market Cycle of Emotions
For most Canadians, any money discussions around the family dinner table did not entail talking about asset allocation, non correlated asset classes or proper portfolio construction. Let alone the other ways money makes money: interest, dividends, capital gains – or how these are taxed…
For most, any money related maters revolved around real estate so its no wonder that most have grown up comfortable with and generally understanding this asset class.
And it is a great investment – one that has created much wealth for individuals over the years.
But so to has the stock market and bond market and all the other “markets”…
But remember, “don’t put all your eggs in one basket”…
This is why I continue the important task of education.
An educated client is a valuable asset to themselves and their families – and to me!
And education is ongoing…it never stops.
While there is allot of information on the Internet there is not allot of “wisdom”. This is what I endeavor to impart to my audience based on what I have learned over the 22 years on working in the financial services industry.
Financial planning is not about the process. It is all about creating peace of mind!
Financial planning is not about products. It is having a program that takes you from where you are to where you want to be!
Financial planning is about discovering needs and pointing to the opportunities.
So what is it that I give clients that they can’t get elsewhere?
Simply put, it’s me—everything I stand for and deliver on.
I want those I work with (and for) to think of me as saving them precious time. I them to feel that the time we spend planning together will make their lives easier and less stressful – so that they don’t have to spend hours worrying about it.
Also, I strive to not only save individuals time in planning and meeting their financial goals, but also enable them to have the cash on hand to do the things you want to do in that extra time.
As a trusted financial advisor, I strive not just to add value, but to create sustainable value – value that’s going to last and hold strong over the long haul.
I endeavor to deliver the three things what will always be in short supply: time, wisdom, and trust.
I trust that this all helps you and has answered your questions
I wish you well as you continue your quest for financial enlightenment.
PS: I had the pleasure of meeting with Sir John Templeton early in my career – that meeting formed the basis for who I am and what I stand for today – and the investment philosophy that guides me and my clients.
You can learn what he told me here:
“As an active and engaged adviser, I am passionate about keeping my clients focused and invested in a way that is consistent both with long-term economic and financial history so they will achieve their life’s goals and ambitions with confidence and peace of mind”.
– Mark Huber, CFP
About The Author
Mark Huber is a full time practicing certified financial planner (CFP).
Mark has distilled 22 years of insights and experience in the financial services industry into “The UnCanadian Way” series of eBooks, audios and videos.
For the latest: “How To Get Rid Of Your Mortgage – The UnCanadian Way”
2008 Mark Huber
This article may be freely distributed if this resource box stays attached.
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