A financial apocalypse descends on the US and the world. Stock Market returns are terrible. Treasury Bills have a negative return. CD rates are falling. What do you put your money in times like these?
A few people have asked me, where do you put your money now? Nothing is safe and the sky is falling. Can you protect your money and make a decent return? The answer is YES!
Invest in Your Debt
Turning debt into an investment is what got us into this mess. But paying off your own debt can keep you out of trouble.
Now is a great time to pay off debt. Why? The Federal Reserve is printing money like crazy. Printing more money effectively makes each existing dollar worth less. There's more many chasing the same goods and services.
Imagine you're playing Monopoly and in the middle of the game, the bank doubles the amount of money each player has. Is everybody richer? Technically yes, but in real terms the money supply has been inflated. So prices of properties at auction will effectively double because there is double the money chasing the same fixed number of properties, houses and hotels.
Debtors Love Inflation
Say in our game of Monopoly you borrowed $100 from the bank. After the bank doubled each players money, your debt has been cut in half! That's what's happening right now.
The $200,000 mortgage you took out to buy your new home in the suburbs is now much cheaper to pay off. Your debt shrinks as the Fed prints more money.
My Debt is Technically Smaller, So What?
Back to secure investments. Right now you'd be lucky to find a CD at 3.5 to 4 percent. CD's are a pretty safe investment. Stocks are very risky right now (as always). So what if I could guarantee you a return of 5 to 6 percent or more? Sounds like a good deal right?
Your Best Investment May be Your Mortgage
If you pay off your mortgage or make extra payments, you have a guaranteed rate of return equivalent to the interest rate on your house. Not only that but that rate will beat an equivalent rate on any taxable investment.
The Real Tax Advantages
When you earn interest from a savings account or CD, you must pay tax on that amount. That tax is based on your marginal tax rate. The marginal tax rate is the amount you pay on your last dollar of income. When you file your taxes your usually have to figure out which income tax bracket you fall in.
Let's assume a 25% (pre-Obama) tax bracket to make the numbers easy. If I earn a 4% return on a CD then after taxes, I'll only get a real return of 3 percent. Three percent will barely keep up with inflation in normal times and won't even come close to the rate of inflation we're currently experiencing.
But a 5% return based on prepaying your mortgage is exactly 5%. And it's guaranteed. The paid home is the safest investment you can make. As long as you can pay your property taxes, that home belongs to your forever. No many how many Wall Street crooks and Washington thugs mess with the system, you will still own your home. And short of a total collapse of the United States, your home is very safe.
But Isn't Mortgage Debt Good?
What about the mythical tax advantages of the mortgage? Considering that only 35% of taxpayers itemize (which you must do to take advantage of the mortgage interest deduction) you probably won't get any more tax benefit than your standard deduction provides.
What if you do itemize? Consider that for each dollar in interest you're saving 25-35% (based on your marginal tax rate). Does it make sense to spend 1 dollar to save 35 cents? If so please send me a check for $100,000. Once it's cashed I'll send you $35,000 back. Sound like a good bargain? Hint: IT'S NOT!
Why The Old Timers Paid Off Their Mortgages
Our grandparents lived through the Great Depression. They understood that banks could fail, companies could go out of business and people could starve to death in the United States. In the old days the bank could call in your home loan any time they wanted. If you didn't have the cash, you could lose your house.
Surviving the Depression
The companies that survive this economic distaster will have one thing in common, strong balance sheets. Low debt and strong cashflows. You need to run your household the same way.
Pay off all that dumb debt now!