When using money doesn’t make sense
If you’re like us, you’d like to reduce your tax bill as much as possible. In many countries, there’s an income tax deduction for mortgage interest. Let’s say your mortgage interest for the year is $1000 and your marginal income tax rate is 35%. You are able to deduct the $1000 in interest payments from your income, so you don’t have to pay the 35% or $350 in taxes on that portion of your income. You have effectively spent $1000 to save $350. You have to pay your mortgage, but this is not financially ideal. If you have the option, you should avoid spending $1000 even if it means you will save $350.
We want your business
To be perfectly honest, we want your business. After all, it is one of the ways we make money. At the same time, we only really want your business if it makes the most sense for you and your personal situation.
The sooner you start the better
All things equal, the sooner you start investing the better. The more money you have the more your investment will grow. The more time you have to invest the more your investment will grow.
Your financial big picture
If you have determined what you have of value (your assets), what you owe (your liabilities) and what your net worth is (the difference between the two) as we discussed in this article, you have a nice view of your financial big picture.
Yes, we want your business. And, yes, the sooner you start the better. However (the big however), maybe you have a smarter option. let’s suppose you have the following:
- A basket of stocks growing at 7% a year
- Student loans with 8.75% interest
- Mortgage with 3.25% interest
You should prioritize how you use the extra income you have to invest or pay down debt. In this case, you should prioritize paying off your student loans over investing more in your stocks, which you should prioritize over paying off your mortgage. For every $100 you spend, you will reduce your student loan interest by $8.75, grow your basket of stocks by $7.00 and reduce your mortgage interest by $3.25. If you have the option, you should avoid paying $8.75 in interest even it means you will lose out on $7.00 in stock growth.