So maybe you have some money on the sidelines, and you're wondering whether you should pay off your mortgage. I actually get this question a lot from both prospects and from clients. In fact, I had a meeting last week with both a prospect and a client who were in this specific situation. I'll talk a little about it, and what they were looking at. So they had between a100 and $200,000 in cash that was sitting on the sidelines, and they were wondering, "Should I just take this money and pay off my mortgage?" And you know what I tell clients often is, I'm the CFO, I mean I'm going to look and do the analysis, I'm going to tell you what my advice is, but you're the CEO and you can trump that at any point. And what do I mean by that? Well from a financial standpoint, it's really not that difficult of a decision, but what happens and what makes it difficult is the emotional side of things.
So there are three different types of people out there when it comes to paying off debt. There are the people who have the wherewithal or the ability to pay their debt off and they do so. And then there are the people who have the ability to pay off their debt and they don't, for whatever reason. And then there are people who don't have the ability to pay the debt off and they don't pay the debt off obviously, right? Most of the people that I work with have the ability to pay the debt off and they pay it off regularly. And they do that because they don't want to owe money to anybody. They feel a burden by owning that money to somebody, and so they feel like you know, "I just want to get out from underneath this mortgage."
But from the math standpoint or from a financial planning standpoint, here's what you want to look at. You want to look at, what's your interest rate on your mortgage, what is the term or length of that mortgage, and do you get tax deductibility on that mortgage? Okay so let's use the example of say, like a 3% mortgage just because it's easy to work with. A 30 year term and then the tax deductibility or the after-tax rate of return, so it'll be like 2% okay? So the question you have to ask yourself is are you going to be getting or can you get with your money greater than 2%? Because that's what you're paying for the mortgage over the next 30 years. And if the answer to that is yes, which is not really that hard if you're a decent investor, then you should use that money and invest it, and you'll get a better rate of return and then more money will be going in your bank account.
But like I said you know, what trumps all of that is you know, if my client or my client's spouse is sitting there saying, "You know what? "I just feel like I want to pay this thing off "because I don't want to have any debt anymore." can't really argue with that.
So anyway, that's my two cents. Not a recommendation for anybody's specific situation. If you do want to talk about that with your certified financial planner or your CPA before making your specific decision, that would be recommended. So take care. Bye-bye.
David Barson, MBA, CFP® is a financial planner and founder of Barson Financial Planning, a Fee-Only Registered Investment Advisor based in San Mateo, California. Barson Financial Planning offers comprehensive financial planning and investment management services specializing in working with those approaching or in retirement and professionals in biotechnology.
Disclaimer
Barson Financial Planning, LLC is a Registered Investment Advisor offering advisory services in the state of CA and in other jurisdictions where exempted. The information contained herein is not intended to be used as a guide to investing or tax advice. This material presented is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Past performance is no guarantee of future results
