Happy Friday my friends!
Fridays in the middle of November are undoubtedly the best days of the week. In my world, Fridays mean dismissal from the office at a healthy time no matter the season. And November means it’s red wine time.
There’s really nothing quite like a glass of red wine on a Friday evening in November.
Especially in lockdown.
This week, I’m bringing back one of my favorite topics I wrote about on The Newsprint a while back. In short, you should have a mortgage for a good, long while.
Quick Thought of the Week
Buying gift certificates from local business to weather this COVID storm is a great idea. However, if you’re a small business owner, don’t mistaken gift certificate sales as revenue.
What gift certificates really do is improve cash flow now and spread out your need to pay back that liability across a long period at some point in the future.
So if you have an influx of gift certificate sales in the next few weeks, remember a few things:
- Gift certificate sales are not revenue; they are a liability until you provide a service to the gift certificate bearer.
- Gift certificates are liabilities that do not bear interest, have no fixed terms of repayment, and are likely paid back over a long period of time. They are messy liabilities to carry and do not improve your company’s balance sheet.
- Gift certificates are annoying to account for.
There’s a lot of accounting talk in there. But in my experience, there’s a misconception between sales revenue and gift certificate sales. Remember, gift certificates have to be paid back with service, or goods, or a combination of the two.
This one combines a few of the worlds I live in: software and investing. I use Roam Research for a variety of tasks in my everyday life, one of which is investment research. My workflow isn’t as intriguing or as in-depth as Ray’s workflow, but I think reading through this Twitter thread could spark some ideas for any would-be or current investors out there.
Another quick point: You don’t need to use Roam Research to organize your stock research like this. There are numerous apps out there that can fulfill this sort of workflow. Hopefully the Roam Research idea sparks something for you, regardless of the software you use to get your work done.
Being Mortgage-Free is Overrated
Note: This post was originally published on The Newsprint.
Another point-of-view of mine that will either result in my wrist being slapped or will result in some more logical decisions: The quest to be mortgage-free is completely over-rated and, often, a detriment to improving your personal net worth.
This is for two reasons:
- Mortgage payments generally don’t take up too much of an individual’s after-tax net income,and so the idea of there being a cash windfall upon payout of the mortgage is mostly a myth.
- Mortgage payments, late in their amortization schedule, are made mostly of principal paymentsand act as a forced savings greater than an individual’s own sheer will.
Let me explain.
The Mythical Cash Windfall
Banks are specifically regulated to ensure they do not lend too large of a mortgage for a borrower to handle. The calculations lenders go through are fairly extensive (or, rather, the computer goes through extensive calculations while the lender punches in the numbers — take your pick), are pretty onerous, and are pretty eye-watering. The onerous calculations and ratios are there to ensure you do not have more to pay back than you can reasonably handle.
As such, a mortgage payment, more likely than not, will only take up $XXX of your overall disposable income on a monthly basis. At the end of the year, if you add up your mortgage payments, I personally doubt they’ll amount to a sum you’d consider a cash windfall.
If you make $1,000 monthly mortgage payments, mortgage-free life would leave you with $12,000 of extra cash in a year. It’s easy math.
I’m not saying $12,000 is nothing. There are many folks who would love to have an extra $12,000 each year.
But I also know that $12,000 doesn’t change anyone’s life. You can spend $12,000 on a 10-day trip to Hawaii. You can spend $12,000 on a camera and a couple lenses. You can spend $12,000 on a down payment for a relatively nice vehicle.
As a whole, the required cash outflows for a mortgage will likely not change your life when you finish paying off that mortgage.
I love forced savings. If, at the end of my financial writing here on Toonie, you don’t understand that forced savings are the kingly method of saving, then I’ve failed.
Forced savings are the best savings.
It’s easy to understand that the last few years of any mortgage carry less of an interest burden and more of a payback on principal. If you take that same $1,000 mortgage payment, more than $900 of that amount will go as direct pay down of the principal of the mortgage in the mortgage's later years.
Ultimately then, once the mortgage is paid off, will you save that same $900+ each month? Or will you divert it to consumption and other less-productive spending?
Debt payments, in the early years of a loan or mortgage, are an expensive way to introduce forced savings into your life (essentially, you're paying an interest premium for the sake of forcing yourself to save). But in the latter part of any loan or mortgage, they are fairly cheap ways to force yourself to save.
My thought: As soon as that mortgage is paid off, get another mortgage and buy more property— but this time, rent that property out. You may not see any extra cash in your bank account. But rest assured, someone else will effectively pay your mortgage for you.
Another idea: you could borrow against your newly paid-off house to invest in dividend-paying shares. If you can find monthly or quarterly dividend payments that are large enough to make interest and principal payments on the borrowed money, you're able to take part in growth of the share price for free. Plus, the interest is deductible for tax purposes (in Canada, mortgage interest on your principal residence is not deductible for tax purposes, but interest on borrowings used to make investments is deductible), ensuring the tax man pays for at least 25% of your borrowing cost.
So my thoughts, in short: Being mortgage-free is over-rated because banking regulations require your mortgage payment to be a small amount in relation to your overall income and because mortgage payments are a great way to force yourself to increase your personal net worth on a scheduled basis.
Obviously, being mortgage-free and debt-free at some point in your life before retirement is a healthy goal — I certainly don't want to be going into retirement with a mortgage. But, debt payments can be a great tool for forcing yourself to improve your personal net worth, especially when those debt payments are for assets that grow on their own.
Thanks for making it through this far friends. I appreciate the growing number of you who have joined me each week and I am ecstatic to see some of these newsletter issues making the rounds. For that, I’m truly grateful.
Have a great weekend and a safe, healthy, and prosperous week ahead.
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