You can be Mr. Investor
Country Routes, August, 1996
Do you believe it's possible to pay for your house, end up with a pile of money and have an extra income,
for the same "cost" as your neighbor (same house value) who ends up with only a house?
It certainly is possible, if you apply some basic financial rules to your life, rules which are simple, but understood by few.
Let's take a mathematical example: Two people each purchase a home for $100,000 putting $25,000 down and
taking a mortgage of $75,000 at 11%. One decides to take a 15 year amortization period, costing $841.01 per
month (principal and interest). We'll call him Mr. Normal (After all, there are dozens of articles written to tell
you how much you will save by paying for your house quickly, but they all ignore how much you will "lose"
by not building what this writer calls a "second" income.")
The other decides to take a 25 year amortization period, costing $721.90 per month (principal and interest)
and saves $119.11 per month in mutual funds where he averages 15% per year. His total payments amount to
($791.90 + $119.11) $841.01 per month, exactly the same as Mr. Normal's. We'll call him Mr. Investor. Over
the next 15 years, both will have "paid out" ($841.01 x 180 months) $151.381. Mr. Normal would have paid it all
on his house, and it would now be paid for.
Mr. Investor would have paid ($791.90 x 180 months) $129,942 on his house and ($119.11 x 180 months)
$21,440 would have been invested at 15%. But Mr. Investor still has 10 years of payments to make on his
house, you say. It's going to cost him that much more. You're right, there are still 10 years of payments left
for Mr. Investor but he decides he's not going to make one more payment from his wages. You see, the $119.11 he saved and
invested each month, averaging 15% per year over 15 years, would now have a value of $80,621. Mr. Investor now decides to
use that pool of money to provide him with a "second income" and starts a mutual fund withdrawal program of
$729.90 per month, having the proceeeds sent directly to his bank where the mortgage payments are made. He
makes no payment whatever from his "first income" (his wages).
This "second income" carries with it little tax liability. Mr. Investor's "pool of capital" is worth $80,621.
By taking a monthly income of $721.90, he is taking a 10 3/4% withdrawal, to pay that mortgage. If the $80,621
continues earning 15%, and he is only taking out 10 3/4%, it will grow by 4 1/4% per year, growing in 10
years to over $120,000.
Now that 25 years have elasped, let's look at the results. Both Mr. Normal and Mr. Investor "paid out" in
that first 15 years, exactly the same amount, namely $151,381. Neither committed one penny more in wages to
the program. But, Mr. Normal ends up with his house, free and clear. Mr. Investor ends up with his house
(free and clear), plus $120,000, and if he wants, a 10% income from his pool of capital which would amount
to $1000 a month of additional income. Both "paid out the same" from their wages.
Which would you rather be - Mr. Normal or Mr. Investor?
Money Matters Index
Home Page