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Should You Pay Off Your Mortgage Early?

By Bigg Success Staff
03-11-08

Bigg Success with Money

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This is one of the most frequently-asked questions we get here at Bigg Success. The question comes in a variety of forms:

Should you make a payment every four weeks? Should you include a little extra with every payment? Or perhaps, you’ve had a windfall and wonder – should you pay it off in its entirety?

9 questions to determine if you should pay off your mortgage early

#1 – Do you have any other debt?
It’s highly likely that you pay less, after taxes, for your mortgage than you pay for any other debt. So pay that debt off before you start funneling additional money into your mortgage.

Look at it this way – you could put your money into an account that pays a guaranteed 20% after taxes or one that guarantees a 5% return after taxes. That’s an easy decision, isn’t it? You’re going to invest in the guaranteed 20%!

When you pay off debt, your return equals your after-tax interest cost. So pay off accounts that cost you the most first.

#2 – Do you have an emergency reserve?
Financial planners disagree on exactly how much you should have in reserve for emergencies. However, there seems to be a consensus of between three and twelve months of living expenses.

It depends somewhat on the source of your income. How secure is it? A stable job with a stable employer (is there such a thing these days?) means you need less of a reserve. For business owners and commissioned sales people, twelve months may serve you best.

#3 – How good is your credit rating?
Depending on how you do it, paying your mortgage off faster is great unless you end up with a month where you’re short on cash. Then you’ll hurt your credit rating. So consider building up money into a separate account that you use to pay your mortgage. As that account accumulates extra money, pay a little more on your mortgage.

At its essence, paying down your mortgage early is an investment in a very illiquid asset. If you don’t have good credit, you may be restricted in getting a home equity line-of-credit should the need arise. You’ll be better off building up your reserve account before you start paying down your mortgage.

#4 – How do you feel about debt?
Some people just can’t be happy as long as they have any debt. If you’re one of those people, and you’re satisfied with your answer to the previous three questions, by all means pay off your mortgage early.

If you have enough cash sitting around to pay it off in full, do it! If that’s not the case, start plowing any additional money you have into it. You’ll feel better just seeing your outstanding balance going down faster.

#5 – What’s your interest rate?
That last question considers your personal psychology. There’s no right or wrong – it’s solely your attitude.

If you can live with debt, then you look at this decision solely from the financial point-of-view – what’s your best financial move? Start by looking at your interest rate:

  • What’s the stated interest rate in your mortgage contract?
  • How much will you pay in income taxes on the next dollar you earn (i.e. your marginal tax rate)?

You’ll end up with the after-tax cost of your mortgage. Now you’re ready for the next three questions.

#6 – How disciplined are you?
How well do you do with extra money? If you tend to spend it, you’ll probably be better off paying off your mortgage early. That guarantees you the after-tax return you just calculated in the previous question.

However, if you’re a good money manager, your options are still open. Look at the next two questions.
 
#7 – When do you plan to retire?
Time is a wonderful thing. The longer your horizon, the higher your return will likely be on your portfolio if you invest correctly. That’s because you can invest in assets that may be more volatile in the short-run, but provide higher returns in the long-run.

In general, the longer it will be before you retire, the less likely it is that you should pay off your mortgage early. Now you’re ready for Question #8.

#8 – What could you earn if you didn’t pay off your mortgage early?
Most likely, you would invest in some combination of stocks and bonds (or mutual funds that invest in the stocks and bonds). In general, the longer it will be before you retire, the higher your stake can be in stocks.

Stocks tend to earn higher rates in the long run, but are more volatile in the near-term. Financial planners generally recommend that you should subtract your age from 120 (it used to be 100, but we’re living longer) to determine the ideal mix. Then look at historical returns on those assets as a barometer of your expected returns.

Now compare that to your answer from Question #5. It’s highly likely that your answer to Question #8 will be higher than your answer from Question #5. If that’s the case, you’re better off investing the money than paying off your mortgage.

#9 – Will your portfolio support your desired lifestyle?

Even if you’re better off investing, look at your current portfolio. Will it generate enough passive income to completely support your desired lifestyle costs? If so, why take any additional risk? Do the safe thing – get rid of your mortgage debt!

Once your mortgage is paid off, you can use that extra amount every month to build up your portfolio even more (if you want). Or you can just enjoy life – you’ve earned it because you’ve done a great job managing your money!

The advice we’ve given here is general. We recommend that you talk with a financial planner or CPA about your specific situation. Just be sure you find one that doesn’t have a stake in your decision. That way, you’ll know you’re getting the best advice for you, not them!

Pay them a reasonable fee for the advice they give you. It will be worth every penny!

Hear today's lesson and laugh on The Bigg Success Show. 

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4 Retirement Questions For Business Owners

By Bigg Success Staff
02-27-08

Bigg on Small Business

Small business owners have some incredible opportunities to prepare for retirement. Yet many entrepreneurs don’t take advantage of them.

Sharebuilder Advisors, LLC recently released their second annual Small Business Annual Retirement Trends survey (SBART). The survey, conducted by Harris Interactive, found that nearly half (47 percent) of small business owners are not adequately prepared for retirement.

What about you?

Are you building a business that can be sold?
You may enjoy a great income from your own business, but that won’t necessarily mean much when you’re ready to retire. If you aren’t there to do the work, will you still be able to draw your income? If so, you probably have a saleable asset. If not, get it to the point where it is, if possible, or divert money to other assets of value.

Do you regularly contribute to a qualified retirement plan?
Small business owners can build a significant portfolio of assets through a qualified retirement plan. Find an advisor who can explain your options so you get the best plan for you and your business.

Your advisor will help you set up a plan that’s not “top-heavy” (i.e. you’re not getting an unfair share compared to your employees), but still meets your retirement needs.

Have you considered a second business?
If your first business can be sold, this may be less of an issue. Even then, why not double the fun? If your first business isn’t saleable, and it’s difficult to see how to turn it into an asset that can be sold, this may be your best move.

There are many ways to do this. However, it’s not as easy as it may sound. Many entrepreneurs succeed wildly with their first business only to get tripped up by their second business.

If you’re interested in pursuing a second business, get our FREE special report, "Don’t Make These Mistakes When You Start Your Second Business."

To get your copy, e-mail us: bigginfo@biggsuccess.com
Type “2nd business report” in the subject line. 

Do you own any income-producing real estate?
If your business isn’t saleable, take the profit from it and invest wisely in real estate to build a significant nest egg. Real estate offers tax-sheltered income, growth in net worth, and an asset that bankers love.

Another nice thing about real estate is that professional management is available in almost every market. So it’s easy for you to own, while someone else manages. That way, you don’t get distracted from your core business.

Many business owners don’t spend enough time planning for their retirement. The years just tick by and the next thing you know, you’re ill-prepared for what should be your golden years. Don’t make this mistake – if you haven’t started already, get started today!

Get today's lesson and laugh on The Bigg Success Show 

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Recession Progression

Pretend that we could eat as much as you want, of whatever you want, whenever you want, with no consequences. What would a lot of people do?

Probably eat a lot of their favorite foods!

Of course, in the real world, we know that if we do that for any period of time, we’ll have to go on a diet.

That’s what a recession is – the economy going on a diet.

It’s just the business cycle. Things go well. People get over-exuberant. Too much debt. Bad investments. Then a recession gets rid of the excesses. It’s part of the evolutionary process.

So today, we want to discuss how to survive and thrive in a recession.

How to survive a recession

  • Develop a contingency plan.
  • Start by asking yourself, “What if …?”

    What if you get laid off?
    What if you have to work longer hours because other people got laid off?
    What if your time gets cut back?
    What if your benefits get cut?
    What if your business takes a hit?

    You know your situation. Think about the most likely scenarios and develop a plan for them. Then, do what you can now.

    For example, why put off updating your resume until you need it? Do it now! Most people wait until they need it. You’ll be a step ahead.

  • Watch your spending
  • Businesses cut spending to get through a recession. We should take a clue. Try to avoid making long-term commitments. In times of uncertainty, wait until you’re more certain before making major purchases.

  • Don’t panic.
  • Resist the urge to drastically change your retirement plan and other long-term investments. You need to look at the specifics of your situation. However, as a general rule, if you won’t need the money for five or more years, you should probably stay the course. Historically, that’s been the best thing to do.

    If you need the money before that, you may want to deploy another strategy. Check with your financial planner to figure out your best option.

How to thrive in a recession

  • Take advantage of low interest rates.
  • Interest rates tend to go down during a recession. So consider refinancing your mortgage and other debt. Business owners may have prepayment penalties, but it may still make sense. In both cases, you need to analyze your specific situation.

    Let’s assume you refinance. Use what you save each month to 38 build your passive income].

  • Keep investing in yourself
  • Once again, let’s take a clue from businesses. Businesses that thrive, after a recession, are often those that kept on investing, during the recession.

    There are a lot of opportunities once a recession ends. Position yourself to thrive – take a class, attend seminars, and go to conferences. You’ll build skills and make great contacts. One of those contacts may lead to your next bigg opportunity!

  • Look for great deals.
  • Once-in-a-lifetime opportunities may present themselves during a recession. People are often more willing to negotiate. You probably won’t find your great opportunity advertised anywhere.

    So how do you find it? Network, network, network! You’ll most likely be surprised by it, so keep your eyes and ears open. Your accidental discovery will be the result of your active searching!

Our Bigg Quote today is by an unknown author.

“A bend in the road is not the end of the road… unless you fail to make the turn.”

So keep your eyes on the road and your hands on the wheel. Be ready for detours so you don’t have to come to a screeching halt!

Next time, we’ll look at the question, “Does it pay to blame others to cover your backside?”

Until then, here’s to your bigg success!

 

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