Last month I had a great meeting with a new client (Zoom of course). I asked this couple, who were first time home buyers, young professionals and really in a good place financially for someone in their late 20?s, ?when you purchase this house how will you know the best place to put your extra cash each month??
The Mr. answered, ?I want to pay off this mortgage as quickly as possible? and the Mrs. answered ?I want to invest our money so we can retire when we are 50 and travel the world.? The couple then looked at each quizzically and then looked at me before saying, ?I guess we need to figure this out together?. I responded, ?I guess we need to figure out where you want to locate your wealth, INSIDE or OUTSIDE your home.?
From there we discussed in more details their goals and what was important to them. Then we discussed what I believe is the ONLY number that matters in personal finance ? EPR?, which is the after-tax cost of their borrowing.
In my book, ?Borrow Smart, Repay Smart? I go into the concept of the cost of borrowing and how it affects many facets of your life. Do you use extra cash to save mortgage interest or use it to invest and have your wealth appreciate there?
This decision can be emotional or based on your goals and the numbers of your financial plan. When I was getting my MBA, Hurdle rate was a key number in corporate finance and this is why I discuss EPR? on a personal financial level. It is the key metric for numbers based financing decisions. I?ve always preached that until you know what your cost of borrowing, you are only guessing at the best way to deploy your money each week or month.
Back to my clients ? in looking at mortgages in the high 2?s% or low 3?s% they decided to focus on investing their extra cash flow for now hence creating more safety and liquidity and searching for a higher rate of return than their EPR?. This aligned with their early retirement goals. From there we circled back to their FA and put together an automated monthly plan to get more dollars invested.
I am here to help if you need it with this type of planning for a client or prospect of yours, just email me to set up a time to talk and we can help others get even more clarity on their personal financial world.
One last note, check out my new Mortgage Resource Center for Advisors, www.famortgagehelp.com