Paying Extra towards Mortgage Early

[muck]

Sorry, but I really think you are making a potentially HUGE financial mistake paying off the mortgage early. Take the money and invest it in a "low to moderate" risk mutual fund instead of paying off the balance. This will afford you:

 

A - More Income (net of tax) over a 5+ year time period.

B - The flexibility of being able to use the funds as you wish without "refinancing".

C - The flexibillity of changing your investment and increasing "A" from above.

 

Do the math. It will be as clear as day.

 

But, what happens if the mutual fund chosen goes down (or even sideways) for the next five years or so?

[Perchoutofwater]

I honestly can't see why anyone would want to pay off their mortgage early. Invest the extra money. You'll come out ahead if you know what you are doing. If you don't know what you are doing, then find someone that does. At the very least, max out any 401Ks, or ROTHs etc.. before doing this.

[yo mama]

At the very least, max out any 401Ks, or ROTHs etc.. before doing this.

Can't argue with that.

[Perchoutofwater]

But, what happens if the mutual fund chosen goes down (or even sideways) for the next five years or so?

 

You don't buy into just one fund, you diversify just like you would if you are buying stocks.

[muck]

You don't buy into just one fund, you diversify just like you would if you are buying stocks.

 

But, what if all the mutual funds you buy are predicated on stock prices going up in order for the mutual fund investor to make money?

 

Said another way ... if you want to make a 10% return, invest in something that you KNOW will give you a 10% return. Stocks may AVERAGE 8-10% / yr (depending on how far back you go for the analysis, and in which country you look), however, there are lots of 5+ year periods where they are flat-to-down. Stocks are not a GUARANTEED 10% return.

 

Mortgage = 6.0%

Marginal Tax Rate = 30%

After Tax Cost of Mortgage = 4.2%

Investment Return = 10%

After Tax Return on Investment = 7.0%

 

After Tax Spread = 2.8% on the amount paid down on the mortgage / year ... ASSUMING ... the 10% was earned in equal amounts each month (which investing in the stock market won't give you, fwiw) ...

 

So, if you earn a 2.8% spread and you pay down your principal $10,000 / year (on average) for five years ... you've paid down $50,000 after five years ... which equates to being about $4500 ahead (after taxes) after five years than you'd be if you simply paid off your house faster ... Again ... this assumes that you're actually going to get 10% / yr for the next five years out of whatever your investments are ... AND ... the 10% was earned evenly over the whole period (i.e., if the returns are front-end loaded, you'll make even less progress (and, in fact may be worse off) than if returns are earned evenly and/or back-end loaded).

 

NOTE: I am not paying off my mortgage faster because I'm investing in things that I am highly confident in that are not tied to someone elses emotion (i.e., the market) that will earn in excess of 12% / yr, pretty much regardless of anything short of a thermonuclear war on US soil (which, if that happens, we will all have bigger fish to fry anyhow).

Edited December 12, 2007 by muck

[Caveman_Nick]

I honestly can't see why anyone would want to pay off their mortgage early.

 

It's nice to be debt free...

[Caveman_Nick]

I am in a cash building mode for the time being and then when I have some additional cash on hand I am going to start into a REIT cycle.

[Coffeeman]

Pay it off early?? I thought Bush said we didn't have to pay off our houses at all! I just ran out and bought a couple expensive hummers - both kinds. What did I miss?

[Azazello1313]

Pay it off early?? I thought Bush said we didn't have to pay off our houses at all!

 

well, not all of us have reggie's "connections"

[Piles]

NOTE: I am not paying off my mortgage faster because I'm investing in things that I am highly confident in that are not tied to someone elses emotion (i.e., the market) that will earn in excess of 12% / yr, pretty much regardless of anything short of a thermonuclear war on US soil (which, if that happens, we will all have bigger fish to fry anyhow).

 

 

Care to elaborate?

[muck]

Care to elaborate?

 

If you're interested in discussing, email me or PM me.

[yo mama]

But, what happens if the mutual fund chosen goes down (or even sideways) for the next five years or so?

That's the downside risk. Pretending that its not there is foolish. Ignoring the opportunity cost and potential upside of investing those funds in the market is equally so. It all comes down to your risk tolerance.

 

The way I look at it, taking a portion of your annual investment funds and paying down debt with the highest effective interest rate is part of maintaining a balanced portfolio. If that debt happens to be your mortgage, so be it. But as long as the effective interest rate (net of tax benefits) is equal or higher to the after-tax ROI I can expect from a conservative bond fund then paying down the mortgage isn't a bad move. You just count it as part of the conservative portion of your portfolio. But I wouldn't put all my surplus funds towards paying down my mortgage anymore than I'd put all my discretionary investment funds into the stock market. That's me, though.

Edited December 13, 2007 by yo mama

[muck]

That's the downside risk. Pretending that its not there is foolish. Ignoring the opportunity cost and potential upside of investing those funds in the market is equally so. It all comes down to your risk tolerance.

 

The way I look at it, taking a portion of your annual investment funds and paying down debt with the highest effective interest rate is part of maintaining a balanced portfolio. If that debt happens to be your mortgage, so be it. But as long as the effective interest rate (net of tax benefits) is equal or higher to the after-tax ROI I can expect from a conservative bond fund then paying down the mortgage isn't a bad move. You just count it as part of the conservative portion of your portfolio. But I wouldn't put all my surplus funds towards paying down my mortgage anymore than I'd put all my discretionary investment funds into the stock market. That's me, though.

 

EXACTLY!!!

 

YoMama = a man after my own heart

 

[polksalet]

EXACTLY!!!

 

YoMama = a man after my own heart

 

 

Ya know, I know it goes without saying that you guys are FARFARFARFARFARFARFARFARFARFARFAR more knowledgeable about investing than I am. My greatest investment achievements have been not investing in Enron and Worldcom when all my friends were doingit and insteadinvesting in Wal-Mart stock. I have had some near misses wth crooked companies and scams and I am extremely diligent in researching anything I buy. Therefore, paying down the house when I get a little extra money is fantastic for me. Once I get the crib paid I can buy a few acres of land and raise, kill, and eat my food which will eliminate a lot of money I now spend. Plus the land will appreciate and freeup my food money for other investments.

[Big Country]

A couple slightly differing opinions on the idea of paying down the mortgage. The first article, by David Bach, is what primarily got me interested in the idea of putting more focus on paying the mortgage off more quickly, especially the part about those that do generally being able to retire several years earlier than those that don't. I defineitely think the bi-weekly payments could be a smart move. The other article by Ben Stein really touches on what yo mama and muck have been saying about considering it as potentially a part of the balanced portfolio.

 

Both articles from Yahoo.

 

Save Big on Your Mortgage

 

Like some of my fellow Yahoo! Finance columnists, I'm often asked if it makes more sense to prepay a mortgage or invest the money in stocks and bonds. Rather than ponder which asset will get you a higher return, I think the better question is which investment decision will free you financially and allow you to retire earlier.

 

In my 9 years of experience as a financial advisor for Morgan Stanley, the clients who paid their debts off early -- specifically their mortgages -- retired 5 to 10 years before those who didn't.

 

 

If your goal is to retire sooner than your friends, sleep well at night, and save a lot of money over time, here's the best approach I know of prepaying your mortgage.

 

Going Biweekly

 

 

When you set up a biweekly mortgage payment plan, instead of making your monthly mortgage payment the way you normally do you split it down the middle and pay half every two weeks.

 

 

The result is that you end up making one extra full payment every year. (Twenty-six half payments is the equivalent of 13 full payments.) The best part is that the extra payment is made gradually over the course of the year, so you don't feel the pinch. And since most people are paid every two weeks, a biweekly payment plan turns out to be a phenomenal budgeting tool.

 

 

Anyone can do this. You don't need a special mortgage, and you can set it up anytime.

 

 

Pay More, Save More

 

 

Say your mortgage payment is $2,000 a month. With a biweekly plan, instead of sending a $2,000 check to your mortgage lender each month, you would send them $1,000 every two weeks.

 

 

By doing this, the miracle of compound interest reduces your debt. You actually end up paying off your mortgage early -- somewhere between 5 and 10 years early, depending on the duration of your loan and your interest rate.

 

 

On average, a U.S. homeowner with a $300,000 mortgage can save upwards of $100,000 over the life of his or her mortgage just by following this simple program. And if that's not enough incentive, think about being debt-free and potentially ready to retire years sooner than you'd planned.

 

 

Let's compare the difference between a monthly and a biweekly payment plan for a $300,000, 30-year mortgage with an interest rate of 7 percent. The monthly payoff schedule winds up incurring a total of $418,026.69 with interest charges over the life of the loan.

 

 

The biweekly schedule, on the other hand, runs up just $311,876.19 with interest. So switching to the biweekly plan will save you more than $106,000. Your mortgage may be smaller or larger, so run the numbers for your mortgage to see how much you can save.

 

 

Automate It, Of Course

 

 

The great thing about switching to a biweekly payment plan is that it allows you to save money over the long run without refinancing or otherwise changing your mortgage. All it takes is one call.

 

 

Most mortgage lenders offer programs designed to totally automate your biweekly mortgage plan. At Wells Fargo, for example, it's called the Accelerated Ownership Plan. Citibank calls it the BiWeekly Advantage Plan. To enroll, all you need to do is phone your lender or go online. Many banks even offer this service for free to customers who do their banking with them.

 

 

Banks that don't offer this service will usually refer you to an outside company that runs the program for them. These companies generally charge a setup fee between $200 and $400. In addition, there's a transfer charge of $2.50 to $6.95 each time your money is moved from your checking account to your mortgage account.

 

 

To be sure you're dealing with a reputable firm, I recommend using one that's referred to you by your mortgage company. One of the biggest such firms is a company called Paymap Inc. It currently provides this service through its Equity Accelerator program, which is powered by Western Union. To find out more, visit their web site or call (800) 209-9700.

 

 

(By the way, I'm not affiliated with Paymap or Western Union in any way, and I don't make money by recommending them. Whenever I mention a specific service or product in my column, it's simply to offer a resource for readers -- not to get a commission.)

 

 

What to Ask Before Signing Up

 

 

When dealing with a service company, be sure to ask the following critical questions:

 

 

• When exactly do they fund the extra payments toward your mortgage?

 

 

The answer should be "immediately." You're making extra payments to pay down your mortgage faster. That won't happen if the service company is holding onto your payments for any reason.

 

 

• What happens if you refinance?

 

 

Determine whether the service is transferable to a new mortgage company, or if you'll have to go through the setup process again -- including paying another fee.

 

 

• How much will it cost to use the program?

 

 

Get a clear understanding of how the costs involved compare to the savings you'll realize, so you can make an informed decision (see the next section).

 

Cost vs. Savings

 

 

Let's do the math. If you're paying $2.50 per transfer every two weeks, that comes to roughly $65 a year. Over 22 years, it totals just over $1,430, not including the setup fee. Figure that the transfer fee will probably go up a little over time, and there's no question that a biweekly mortgage system will cost you a few thousand dollars.

 

 

So why do it? The answer is that the few thousand dollars you're spending will save you tens of thousands of dollars, if not more.

 

 

In the example above, you would've saved more than $106,000 over the life of the mortgage. Assuming that you signed up with the most expensive program out there to handle your biweekly payments, and spent $5,000 over 22 years, you're still ahead over $100,000.

 

Going It Alone

 

Are there other, no-cost mortgage prepayment options? Sure. You could pay an additional 10 percent of your mortgage each month and have it applied directly toward the principal. Or you could make one extra payment at the end of the year and again have it go toward your principal.

 

 

But note that word "could" -- some things are much easier said than done. Just as most people won't save if they don't make it automatic, most of us won't make extra mortgage payments unless it's automated.

 

 

If you decide to do it yourself, my suggestion is that you pay an extra 10 percent a month and send it as a separate payment -- automatically, of course. Make a point of telling your lender to apply any extra payments toward your principal, and then check your monthly statements to make sure they've applied it correctly.

 

When Paying Off Doesn't Pay

 

I was going to write a humor piece about the horrors of summer business travel, but after a spectacularly terrifying experience last night flying from Chicago to L.A., I decided I'd better put that in the "too awful to be told" category rather than the humor one for a while.

 

Instead, I'll deal with some frequently asked questions about finance, and personal finance in particular.

 

 

Plenty of Liquids

 

 

I get many letters asking whether it's better to pay off your mortgage or invest the money in the stock market instead. This is a complex question, but I'll offer several ways of thinking about it.

 

 

First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn't have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times.

 

 

As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There's nothing magically good about having a paid-off mortgage, but there's something seriously bad about not having ready liquid assets even if your home is paid for.

 

 

Slow and Steady

 

Yes, I know you can refinance and borrow against your house. But that takes time and creates aggravation. Why not just pay off the mortgage slowly but steadily and hang onto the liquidity that makes life so much more comfortable instead?

 

 

This is especially true if you're an older person. It doesn't do you one bit of harm to leave a home with a mortgage to your heirs. That's their problem -- and it's a very small problem.

 

It's far better in your later years to have cash on hand when you need it than to burn the mortgage note in the proverbial fireplace.

 

On Returning

 

 

But what if you can pay off the mortgage and still have plenty left for your liquidity needs? Even then, I'd think twice about rushing to pay off the mortgage.

 

As pointed out to me by my fraternity brother Larry Lissitzyn -- a very smart investor -- we earn, in rough terms, what the rate of interest was on a mortgage (not counting the immense tax benefit of the mortgage interest's deductibility) when we pay it off.

 

That is, if you have a mortgage with 6.5 percent interest, you'd earn roughly 6.5 percent by paying it off early. That's a fine rate of return and nothing to sneeze at. But the rate of return on broad U.S. stock market indexes over very long periods is closer to 9 percent -- a substantial difference.

 

Stocking Up

 

 

To be sure, there are long periods when the stock market doesn't return even close to 9 percent per annum. But it usually does, again on average and again over long periods. So you might be better off -- again -- just paying off your mortgage month by month and not taking the money out of the stock market.

 

 

On the other hand, if you have plenty of stocks according to your investment advisor and a huge surplus of cash -- which many people do have -- you might well want to use some of that to pay down your mortgage. A standard mortgage is now in the high sixes, and you won't get a risk-free return of that scale on any cash instrument I know of.

 

 

In short, unless you're sitting on surplus cash, I see no urgent reason to pay down or pay off your mortgage in a hurry.

 

Gold-Standard Advice

 

 

The second question I'm frequently asked is, Should I buy gold? I've never been a fan of gold as an investment. I know that since the early 1970s it's gone up from about $35 an ounce to (at one point) the high nine-hundreds. But it's also fluctuated wildly.

 

 

Gold has been "limit down" day after day in some bad periods. It dropped by almost two-thirds from the late '70s into the early '80s. It pays no dividends. And it's subject to attempts at market manipulation.

 

 

If you feel you absolutely must participate in precious metals I suggest buying gold jewelry, or else buying stock in highly diversified precious metals ETFs and mutual funds that combine many gold and silver mining stocks from all over the world. They fluctuate far less often than the raw material, yet they can grow dramatically if the metals rise.

 

 

Gold is lovely as a gift, then, but I don't see it as an investment for the ordinary citizen unless he or she is compulsively attached to its luster.

 

Trust Funds

 

 

Third, how do you play the falling dollar? Again, I wouldn't recommend speculation in the currency itself. That's far, far, far too treacherous for the ordinary investor.

 

 

But you can buy mutual funds and ETFs that own European, Asian, and Australian stocks, plus Canadian and South American stocks. These are usually denominated in the local currency. As it rises against the dollar, your investment is translated back into dollars and gets to be ever more valuable. Plus, you have the gain in profitability of the foreign stocks should there be any.

 

 

As I've said many times, I recommend the EFA ETF for investments in European, Australian, and Asian developed economies -- it's especially heavy into the United Kingdom. I recommend the EEM or the ADRE for investments in developing countries in Asia, South and Central America, and Eastern Europe. All of these have benefited greatly in recent years from the dollar's fall, and they do pay dividends, unlike gold.

 

 

The growth in value of these funds has been so immense that I wouldn't expect it to continue at anything like the recent rate. And there have been some serious fluctuations in the developing markets, even to a stomach-turning degree. But even if the EFA, the EEM, and ADRE grew at half their recent rate, you'd handily beat the Dow and S&P's recent moves. I wouldn't put most of my savings into these vehicles, but for a quarter to a half, you might consider it..

[Caveman_Nick]

I think that most of the people posting in this thread would agree on a few things:

 

1) there are many ways to help yourself financially. "The best" way is subjective, and depends on many choices you make.

 

2) Anyone worth their salt would advise to try and make multiple investments in different places. Generally tax free investing such as retirement investing in 401K plans is encouraged, and then some combination of paying down mortgage debt and spreading money around to different investment options.

 

Having accomplished the 401K investment habit and the mortgage paydown, I myself am working on a mix of

- Real Estate Investment Trusts

- Tax Free Municipal bonds

- Mutual fund investments, concentrating on mixing domestic and foreign markets.

- CDs

 

This is all about working out a plan to put money in different places at different times, and especially with different terms of investment (length of investment).

 

The fact is that arguing over which way to go about it is not as productive as just investing extra income in places where you are comfortable putting it.

[Dragon]

The fact is that arguing over which way to go about it is not as productive as just investing extra income in places where you are comfortable putting it.

 

I agree with 99% of your post, however I am still a firm believer that paying off your mortgage early (assuming the interest rate is reasonable) is NOT part of a sound investment strategy. I do however agree that there is a certain level of comfort in doing so, and it is better than nothing.

[The Irish Doggy]

I'm just going to stash the money away in a wall and let someone else find it 80 years later.

[I Like Soup]

I agree with 99% of your post, however I am still a firm believer that paying off your mortgage early (assuming the interest rate is reasonable) is NOT part of a sound investment strategy. I do however agree that there is a certain level of comfort in doing so, and it is better than nothing.

Agreed, to a point. But some people don't look at paying off their mortgage as an investment strategy. I think the lowest risk approach is paying off your mortgage.

[Caveman_Nick]

I agree with 99% of your post, however I am still a firm believer that paying off your mortgage early (assuming the interest rate is reasonable) is NOT part of a sound investment strategy. I do however agree that there is a certain level of comfort in doing so, and it is better than nothing.

 

 

I dunno what you do for a living. You might be in the financial industry in some way. I am not a financial professional by any means. I am just a guy that has worked pretty hard to get to where I am financially and has put himself in a pretty good position.

 

You may look at things in terms of investment value, etc. I look at them in terms of having a financial plan. People need relatively simple things to survive in this world, and that is mainly food, shelter, medical care and clothing. The rest of it is gravy. The average person needs to be able to see for themselves some kind of support in what they do with their money in these terms, because otherwise the chances of them sticking with a plan decrease.

 

401K for retirement and securing life long shelter as well as a valuable asset are two of the things that people can really sink their teeth into as concepts and are things that are closely and easily monitored in most people's lives. I don't think anyone is advocating that paying off a house is the most advantageous way to accumulate wealth. What is being advocated is that it is something that people will do to have a net positive effect on their financial situation.

 

You can't say that it is not part of a sound investment strategy, because you have to look at both the alternatives (which are often doing nothing) and the perceived and tangible benefits of the investor. If someone is smart about their money, cash flow will almost assuredly increase in time as compared to a debt like a mortgage. But often times this kind of beginning to financial planning is an excellent stepping stone to taking that increase in cash flow and doing good things with it. Not everyone jumps into mutual fund investing easily. And some that do, like my brother many years ago, jump in with both feet and get screwed, and are really slow to invest again.

 

Investment strategy is not about what your money is doing right now, it's about reaching a goal and having a positive effect on your net worth while reaching that goal. Unless you are trying to show that paying down a mortgage early does not have both a positive effect on net worth and help people achieve certain goals, then I would like to hear what kind of reasoning you are trying to use in saying that it is unsound investment strategy. It sure as heck is more sound than the people that invested in Enron instead. And if you are trying to show that......then I think you'll have to back it up with some numbers.

Edited December 14, 2007 by Caveman_Nick

[Dragon]

I dunno what you do for a living. You might be in the financial industry in some way.

 

I'm a CFO and a CPA. That does not make me more or less qualified to speak on this subject, but you kind of asked, and it does influence my perspective.

 

I am just a guy that has worked pretty hard to get to where I am financially and has put himself in a pretty good position.

 

Me too - 5 kids and a stay at home wife. Actually, you're financial position is probably better than mine.

 

You may look at things in terms of investment value, etc. I look at them in terms of having a financial plan. People need relatively simple things to survive in this world, and that is mainly food, shelter, medical care and clothing. The rest of it is gravy. The average person needs to be able to see for themselves some kind of support in what they do with their money in these terms, because otherwise the chances of them sticking with a plan decrease.

 

There's the difference - I see investment value and a financial plan as integral parts with each other, not as two unrelated ideals. What better way for the average person to be encouraged than by an appreciating, liquid, asset(s).

 

I agreed that paying off a mortgage is better than nothing. But to me, it is like having your taxes over withheld during the year to make sure you get a refund - it is "a" method of savings, particularly for those with little fiscal discipline, but it is not "sound".

 

Just My Opinion.

Edited December 14, 2007 by Dragon

[muck]

Chiming in here...

 

Full time investment dude here ... essentially managing a handful of private investment partnerships for accredited investors in the US and Canada ...

 

Investment option A = buying stocks

Investment option B = buying taxable fixed income securities (i.e., treasury and corporate bonds (including CDs)

Investment option C = buying tax free bonds

 

Investment A:

Average return over the last 50-80yrs is around 8-10% / yr (before taxes)

Assuming 100% of the returns are long-term, you're looking at average returns of 6.4% to 8.0% after taxes

About 2/3 of the years will witness returns of somewhere between -8% to +25% (pretax)

About 85% of the time, annual returns will be between -25% and +40% (pretax) ... meaning, twice in a decade, you may see annual returns that are more extreme that these

 

Investment B:

Average pre-tax returns are in the 5-7% range

Assuming no capital gains (i.e., all bonds are held to maturity and you're marginal state/federal tax rate is 30%), you're looking at at average returns of 3.5% to 4.9%

About 2/3 of the years will witness returns of somewhere between -4% to +15% (pretax)

 

Investment C:

Average pre-tax returns are in the 3-5% range

Assuming no capital gains, you're still looking at average returns in the 3-5% range

About 2/3 of the years will witness returns of somewhere between -6% to +13% (pretax)

 

.........

 

Paying down your 7% mortgage equates to nothing more than a guaranteed 4.9% return on your investment (in post-tax terms) ... nothing more, nothing less.

 

So, if you do not believe (i.e., KNOW) you can earn more than 4.9% after taxes, paying down your mortgage is a reasonable thing to do. Then, when you're confident of your ability to outperform the cost of capital, then re-mortgage the house and invest.

 

My clients and I are invested in a phenomenally wide variety of things, all around the world. I'm not a fan of "buying and hoping it goes up" as a way to make money...which is essentially what the stock market is. I prefer a more business-like (i.e., a more confident and proactive) approach. How is 'this thing' (whatever it is) going to make money...how will it lose money. If I can have a significant influence on the outcome, I'm more likely to make the investment. If I have to hope that other people see what I see in order to be validated, I'm less likely to do it.

Edited December 14, 2007 by muck

[yo mama]

I agreed that paying off a mortgage is better than nothing. But to me, it is like having your taxes over withheld during the year to make sure you get a refund - it is "a" method of savings, particularly for those with little fiscal discipline, but it is not "sound".

That's a horrible analogy. Over withholding to get a refund provides no economic benefit whatsoever outside of the amount refunded, plus you've lost the time value of money during period leading up to the refund.

 

Prepaying a mortgage provides the baseline economic benefit of reducing debt, but provides the added benefit of forever foregoing interest payments on the amount prepaid. You've experienced a guaranteed improvement in your economic situation; the only thing you've lost is the opportunity to invest that money elsewhere. Your point is only that you feel you can find a ROI that exceeds your mortgage's interest rate, net of tax benefits.

Edited December 14, 2007 by yo mama

[Dragon]

That's a horrible analogy. Over withholding to get a refund provides no economic benefit whatsoever outside of the amount refunded, plus you've lost the time value of money during period leading up to the refund.

 

Prepaying a mortgage provides the baseline economic benefit of reducing debt, but provides the added benefit of forever foregoing interest payments on the amount prepaid. You've experienced a guaranteed improvement in your economic situation; the only thing you've lost is the opportunity to invest that money elsewhere. Your point is only that you feel you can find a ROI that exceeds your mortgage's interest rate, net of tax benefits.

 

Isn't the refund itself an economic benefit.

 

Actually, the analogy is more on target than I originally intended it to be - having your taxes over withheld provides the baseline economic benefit of saving money, i.e. not spending it. Come April, you experience a guaranteed improvement in your economic situation (Cash), and the only thing you've lost is the opportunity ton invest that money elsewhere for a greater return (which is kinda related to the time value of money thingy you brought up).

 

Look, do want you friggin' want - it's your money. Focus on the analogy and gloss over the point of the discussion if you want, I really don't care. The fact of the matter is that there are no stone cold factual solutions to the matter - It's opinion, and it's in part based on prior performance of certain investments (which by the way, does not guarantee future performance). If I choose the right investment, it was right. If I don't, it wasn't.

Edited December 14, 2007 by Dragon

[yo mama]

Isn't the refund itself an economic benefit.

No, it isn't. Before the refund you had a receivable on your balance sheet. Afterwards, you credit the receivable and debit an equal amount of cash. No net economic gain; the only change is in the liquidity of the asset. The same is true if you take cash and use it pay down debt. On a stand alone basis, no net gain on your personal balance sheet. The difference lies in the fact that you've just permanently reduced your obligation to pay interest in the future. An amount over withheld during the year from your paycheck offers no corollary economic benefit. That's why its a bad analogy.

 

You said you were a CFO?

Edited December 14, 2007 by yo mama