What Should you Do with $200 per Month?
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What Should you Do with $200 per Month? Do you have $200 per month that you want to put to good use? Should you prepay your mortgage? Invest? Pay off high interest credit card debt? Bonnie Biafore has an interesting discussion of this subject in her latest blog posting. http://blogs.oreilly.com/missingmanuals/blog/2010/07/alternatives_to_paying_off_you.html You might be surprised. -- Laurie Frederiksen Invest with your friends! www.bivio.com Follow us on twitter! www.twitter.com/bivio I would be surprised, because her analysis is flawed. Paying off the credit card is always better than paying down the mortgage. She's comparing the interest savings over 21 years of mortgage payments to those over 2 years of credit card payments. If you pay the credit card off first, you can then apply the $200 olus the monthly credit card payment to the remaining mortgage debt.
Ira Smilovitz
Join me at InvestEd 2010 Investor Education at Its BestTM
Baltimore, MD August 6 - 8, 2010 http://www.investor-education2010.org/ In a message dated 07/13/10 10:09:16 Eastern Daylight Time, laurie@bivio.biz writes:
Here's my response to Bonnie... (I can't seem to get it to post as a comment on her blog.)
Your final analysis of credit card vs. mortgage repayment is flawed because you're made two errors.
First, your last bullet point is wrong, because the mortgage interest savings are $49K, not $81K. If you pay less interest out-of-pocket, you get less of a tax break, not more.
Second, you're comparing vastly different time periods in this analysis. If you prepay the credit card at $300/month, you reduce the payoff period from 8+ years to about 20 months.
Your analysis assumes that the $200/month vanishes after the credit card is paid off, yet continues to be available for another 20 years when used to pay off the mortgage.
The correct comparison would be to compare using the extra $200/month to pay off the credit card and then using the extra $300/month (extra $200 plus the $100 not needed for the credit card) against the mortgage until it was paid off vs. using the extra $200/month against the mortgage until the credit card was paid off at $100/month and then an additional $100/month (for a total of $300) against the mortgage until it was paid off.
In this comparison, paying the credit card first incurs about $770 in credit card interest and $123.5K of mortgage interest less $31K in tax savings for a total of about $93K out-of-pocket.
Applying all of the extra money solely to the mortgage incurs about $5K in credit card interest and $126K in mortgage interest less $31.5K of tax savings for a total of $99.5K out-of-pocket.
While there may be other reasons for paying off a mortgage first, paying off a higher interest rate, non-tax-advantaged debt is always preferrable from a strictly dollars and cents perspective. Ira Smilovitz
Join me at InvestEd 2010
Investor Education at Its BestTM Baltimore, MD August 6 - 8, 2010 http://www.investor-education2010.org/ In a message dated 07/13/10 10:09:16 Eastern Daylight Time, laurie@bivio.biz writes:
Hi Ira and the rest of the Club Cafe, Leave it to Ira to find things that my reviewers didn't. I will get back to you with some info next week, but I am on tight deadlines this week. Sorry for the delay. B iras1 wrote: > Here's my response to Bonnie... (I can't seem to get it to post as a comment on her blog.) > > > Your final analysis of credit card vs. mortgage repayment is flawed because you're made two errors. |
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