Cashflow game 25/9/04 - don't payoff your mortgage!

[ren-A]

G'day all,

Quick update on our latest game in sydney. Brad was our host once again,
this time for myself and my 12yo son John, and a friend of Brad's
Adam.

A quick start with some good deals up early saw me pay off all debt
within an hour (go MYT4U!). I soon saw the error of that though, as I
had insufficient cash to do 3-4 big deals in a row - any of which
would have got me out of the rat race. :( Eventually I clawed my way to
the point when I could have exited the rat race, but decided to stay
in (I thought to build up fast-track starting income). Instead I had
a child, and that pushed my expenses back over my passive and I was
back in the Rat Race! :mad:

Brad had a quiet smile on his face as he explained that the home
mortgage is the cheapest debt we get. He suggests NOT paying it off
(it's "negative" ROI of 0.5%) but holding onto the cash to plonk into
the good deals that come up - at ROIs of 20%+. Makes sense, doesn't
it? Brad says that he pays off retail debt only, and lets the rest
ride. :rolleyes:

Amazing - every time I play I learn more about my finances and my
personal (mis)beliefs about debt. And my kids are getting a great head start.

Thanks Brad for yet another great learning!

Back to the game, whilst I groaned around the Board, son John caught
up to me, followed me out of the Rat Race on the same turn and then
led around the Fast Track. A lucky dice roll saw me buy my dream and
set up a stock market for kids for the win.

Again, another great game with great learnings.

Am looking forward to next game on 23/10 - see next post

[likewow]

Id like to disagreee that PPOR mortgage is the cheapest debt and should be left unpaid for the following reasons:

Repayments need to be paid with 'after tax' dollars.

Repayments arent tax deductible.

You could consider the earn on not paying mortgage repayments as whatever the current interest rate is plus not having to pay tax if you were banking or investing the same amount. (Not sure if i explained that well)

Paying off your mortgage frees up huge amounts of equity to be used for investing, which most people use to start off.

Security for your family.



Im sure there are more but just these are enough for most people to pay off their mortgage.

[ren-A]

You could consider the earn on not paying mortgage repayments as whatever the current interest rate is plus not having to pay tax if you were banking or investing the same amount. (Not sure if i explained that well)


G'day likewow - good point - I should have differentiated the in-game strategy from real-life.

In real-life, you're right, the decision to pay off your mortgage is akin to seeking a pre-tax investment of (I think)

mortgage rate / marginal rate of tax

So if I had a mortgage tate of 7% and a MRT of 45%, then I'd have to earn 15.6% from other pre-tax investments.

One point to consider is that "investing" in my home this way brings me in no income $s. Investing in property or shares gives me income and builds my asset base through capital growth at the same time.

Hope this helps.

[likewow]

Thats true, no income but it increases your equity with every payment and your PPOR is growing in value all the time. And one day will free up a lot of after tax income, not to mention that the money you will use to invest will only be available from your income after your mortgage payment is made so paying it off will eventually give you a lot of income to invest and a lot of equity.

I remember once seeing the total amount of interest paid on a mortgage of say $250-300k if left for its whole 25 years to pay off and it was enough to shock me into paying out my mortgage years ago. I think it was not a lot less then the principal amount.

[PT_Bear]

Cashflow is a game based on the US financial system. The strategies employed to win the game may not nessesarily be the best for the Australian environment.

The main thing is that you learn from it. In Australia paying off your mortgage can be a very wise move it done at the right time for the right reasons. The main thing is that the game is making you think about what you're doing and challenging your beliefs (right or wrong).