A Penny Saved is a Penny Earned!

I’ve spoken to a number of clients recently who are nervous about the stock market’s near-term future.  It’s been on a rally for nearly 8 years, the second longest “bull run” in history.  With current economic and political uncertainty, many are wondering where to safely invest their money.

Dow Jones Index over past 100 years

The current bull run has seen the Dow Jones index rise over 250% since early 2009.

Last month I posted about investing in real estate.  Some folks, however, have no interest in owning more real estate.  For those in that camp, may I suggest “Earning By Saving.”  In other words, by paying down debt you can earn a guaranteed rate of return that compounds over time.  After all, a penny saved is a penny earned!

The best way to do this is by refinancing to a shorter term loan, such as a 15-yr fixed mortgage.  Lenders offer lower rates if you select a shorter payback term, so while someone may have obtained a great rate on a 30-year fixed loan a few years ago, today’s 15-yr rates are even better!

Here’s an example: a client obtained a $300,000 30-yr fixed mortgage at 4% back in 2014.  Their loan balance is now down to ~$283,000.  Refinancing to a new 30-yr mortgage doesn’t make any sense, as current rates aren’t much better than their 4% rate.  But, when looking at a 15-yr fixed refinance, the new rate would be 3.25% (APR 3.33%). The monthly payment increases by $570 due to the shorter payoff period, but thousands of dollars are saved each year in interest cost.  Over the 15-yr period, $62,000 will be saved in interest costs and the home will be paid off completely!

If you find yourself in a position where you can invest more money every month but won’t or can’t put it in stocks or real estate, I would strongly encourage you to look into refinancing into a shorter term mortgage.  As Albert Einstein famously said, “compound interest is the strongest force in the universe.”  Its mighty power works when you invest, and works just the same when you pay down debt.

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