Better Math?

Tom thinks he has better math than Dave by not doubling up on his house payment and investing in mutual funds instead.

QUESTION: Tom has a mortgage that he’s paying off, but instead of doubling up the payments on it, he’s taking his extra money and investing it at 12%. Isn’t that better than paying off the house? Dave doesn’t agree.

ANSWER: It doesn’t make sense. Your math is a little bit naive. The spread of 12% leaves out risk and taxes. When you factor those in, you come out about even. If a disaster happens and your house is paid for, your mentality is totally different, and lots better. Pay off the house and then invest in a mutual fund.