Friday, April 29, 2011

Should you use extra cash to pay down your mortgage?

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Should you pay off your mortgage as quickly as possible? Or are you better off paying it over 30 years and investing any extra cash? A lot of misinformation can be found among the financial “experts,” and one of the favorite is this argument:

Keep your mortgage in place to maximize your tax deduction.

Why is this bad advice? The math simply does not add up. For example, a family paying a federal rate of 28% plus a state rate of 5% is liable for 33% of taxable income. So if your total mortgage interest is $12,000 this year, it comes out like this:

$12,000 interest – 33% tax liability of $3,960 = $8,040 net after-tax interest

In other words, even after tax benefits, you are still paying 67% of the gross interest cost after allowing for the tax deduction. If you could eliminate the entire mortgage debt, you would save the after-tax interest of $8,040 per year.

A second myth is that you are better off investing your cash elsewhere. The argument is:

Invest any extra cash to increase your investment income.

There is also a problem with this argument. That extra investment income will be taxable, so even if you could match your 5% mortgage with 5% interest income, is the risk comparable? Your home is insured, you maintain it, and it provides many benefits beyond just being an investment. If you make 5% by investing elsewhere, what level of risk exposure do you accept? Chances are that the risk you take to earn 5% is not as valuable as the investment risk of paying 5% on your home mortgage.

Is that 5% cost really such a big deal? Yes. If you are paying 5% on a 30-year fixed rate mortgage starting at $100,000, your total interest cost is $93,259, so that your $100,000 mortgage costs nearly double to get paid off.

Some additional startling facts about your mortgage (all based on a $100,000, 30-year fixed-rate mortgage):

- At the end of five years, you have only paid off about 8% of your mortgage. Considering that most people move to a new home after five years, that means your 60 months of payments were almost entirely interest.

- At the end of 20 years, your mortgage is only one-half paid off. The other half is repaid over the last 10 years.

- Adding $50 extra to your payment each month takes five years off the repayment term, reducing it to 25 years and saving about $18,000 in interest.

Mortgage interest is calculated based on the remaining balance each month, so the higher your balance, the more of your payment goes to interest. This is why paying off as much as you can early on — a process called mortgage acceleration — is a valuable investment. If your mortgage is fixed at 5%, every dollar you prepay today yields you a reduced interest of 5% at a compounded rate. That is going to be a much smarter and safer investment than you can make anywhere else.

Michael C. Thomsett is author of over 60 books, including Annual Reports 101 (Amacom Books Press), Trading with Candlesticks (FT Press) and the just released new book, Getting Started in Stock Investing and Trading (John Wiley and Sons). He lives in Nashville, Tennessee and writes full time.

This post was provided by Minyanville.com.

Friday, April 15, 2011

America Cares About Buying Guns, Not Educating Kids

APRIL 15, 2011
BY LIZ DWYER : GOOD

In this year's State of the Union speech, President Obama called for a "Sputnik" movement in education, and asked our nation to do what's necessary "to give every child a chance to succeed" and compete with their international peers. Sadly, the latest federal spending bill includes more than $38 billion in cuts to K-12 and higher education programs. When you look at how much we're spending on defense, it's pretty clear: Our national priority isn't really education, it's buying guns and missiles.

Indeed, on Tuesday, our culture editor Cord wrote aboutSwedish-based think tank SIPRI's latest report, which details that since 2001, the United States' defense spending has increased 81 percent. And, we spend almost 43 percent of the money the entire world allocates to defense.

military.spending

Critics of our nation's public schools point to China's stellarinternational test results as a sign that we're falling behind our Asian counterparts when it comes to academic achievement. Notice that we spend six times more money on defense than China and we only have roughly one-fourth the number of people.

According to 2010 figures from the Office of Management and Budget, we're set to spend 20 percent of our federal budget on defense and a mere 3 percent on education. As the chart below from nonpartisan think tank Project America shows, Federal spending on education has never topped 4 percent of the budget—and is on its way down again.

federal spending

Literacy, technology, and scholarships are all being slashed this year. The number of Pell grants low income students can receive has been reduced from two to one, and essential AmeriCorps programs like Teach For America, the National Writing Project, and City Year have been defunded. Federal stimulus money to help cash-strapped state governments funnel money to schools has dried up. As a result, states hit by the economic downturn continue to cut billions from education.

But, as the SIPRI report points out, "even in the face of efforts to bring down the soaring US budget deficit, military spending continues to receive privileged treatment." And, despite putting education on the chopping block, House Speaker John Boehner (R-OH) is passing legislation increasing defense spending.

So much for the argument that we're just throwing money at America's education challenges. We've never come close to trying that.

Best regards

Ray1man

Sunday, April 10, 2011

Bullet trains good for jobs

Since the elections in November, newly elected Republican governors have been falling over themselves to return federal funding earmarked for high-speed rail. Their rationale is that once the rail project is built, the state will be the one bearing the operating cost while the trains lose money because no one is riding them. A new report says that this strategy is going to backfire: High-speed rail can be a huge driver of jobs and economic growth, and the government has already committed to at least $10 billion worth of spending, with plans for tens of billions more in the coming years.

The report, "The Case for Business Investment in High-Speed and Intercity Passenger Rail" (PDF) by the American Public Transportation Association finds that in addition to the obvious, but temporary, construction jobs, the benefits ripple out throughout an economy. Most importantly, for each $1 billion spent on train construction, 24,000 permanent jobs are created. That's a mere $41,667 per job, which looks downright cheap when you're staring down 9% unemployment.

The California High-Speed Rail Authority estimates that building a high-speed rail link between L.A. and San Francisco would result in 600,000 construction jobs and 450,000 permanent new jobs. There are currently 2.2 million unemployed people in the state; high-speed rail would halve its unemployment rate. Here is how high-speed rail would affect some major American cities, to the tune of billions of dollars in economic growth and new wages:

The concern with high-speed rail, as explained by the governors in states like Wisconsinand Florida is that no one will ride it. And while rail ridership is at an all-time high, it's a fair worry. Amtrak has trouble making ends meet. But what they're forgetting is that people don't want to ride trains not because they hate trains, but because trains aren't that fast. If you make the trains faster, people will ride them. Here is what happened in Europe when they added high-speed rail:

Shocking, yes, but if you spend the money to make the train more convenient, more people will pay to ride on it! And its not as if we really need to push that hard. In the crowded Northeast Corridor (the perfect place for high-speed rail), 62% of the people choosing between taking a train or a plane from Washington, D.C. to New York pick the train, as do 47% of Boston to New York travelers. And the people who choose the train instead of driving would decrease wear on the roads, resulting in $270 billion in road repair savings by 2050. That pays for the trains right there. And lest we forget the environmental benefits, remember, trains are the most efficient mode of passenger movement, especially high-speed ones:

Better for the bottom line, better for the environment. Plus, you're not stuck in traffic and your friendly TSA agent doesn't have to touch you in your special place before you get on.

Follow Fast Company on Twitter. Morgan Clendaniel can be reached by email or onTwitter.

[Photo by Flickr user danielfoster437]