Briefcase Study

January 2014: Briefcase Study

In Briefcase Study, January 2014 by Adam Cufr

Each issue of The Steward will include a brief case study. In it, strategies will be highlighted that we utilize in solving problems and creating opportunities for our clients. We hope you’ll enjoy this case study and find some wisdom in it that may help you in your own planning.

Should we pay off our home?

Over the years, this question has been raised many times. It’s fun to answer because it is ripe with nuance. What seems like a no-brainer (“Of course, who wouldn’t want a paid-for house?”) can be much more than meets the eye.

You may have heard me use this expression “With almost all financial decisions, there is a continuum: on one hand, you have the mathematical answer and on the other hand is the emotional answer. Most people ultimately choose somewhere in-between.” Let’s apply this to your home.

The Emotional Answer

It feels great to be debt-free. The grass feels better under your feet when you own your home free-and-clear. Nobody can take it away from you. The money you used to direct to the bank can now be redirected to other uses, like retirement savings or discretionary spending. What a relief to finally be debt free!

The Mathematical Answer

The bank is allowing you to use their money for up to 30 years and the interest you pay them for its use is tax deductible (up to $1,000,000). If you can earn a higher return on that money than what you pay the bank, you get to keep the difference. This is called spread or arbitrage. Let’s look at an example:

notecard math

When we are having this discussion, we are making some assumptions. First, we’re assuming that there’s a place to earn 6% that does not involve significant risk. That depends on a lot of factors. We are also assuming that you want to keep “managing” the debt so as to create the additional wealth. Not everyone is so inclined.

As with any major financial decision, the right answer depends on a myriad of factors. What is right for one person may be ill-advised for someone else. I share this example because many people ask about it, especially as retirement age nears. If we stop and thoughtfully consider the choices available, we may be surprised at the opportunities.

If you would like to discuss your specific situation further, please contact us at Steward@FourthDimensionFinancial.com or call our office today at (419) 931-0704.