The amount of DEBT we are all carrying is causing bankruptcies, foreclosures and even countries to fail as the World’s “the Debt Crisis” rages on. Never before has debt been a more terrifying specter. Oddly enough, there are good aspects of debt. Well, one good aspect of debt and how you manage that debt can be an intricate and smart bonus on your road to financial recovery.
Many family budgets are still under extreme pressure. Yet for those who did tighten their belts and have continued to live cautiously as [a small] recovery takes hold, where is a safe place to put money? Should you put that little extra towards paying down your mortgage a bit? Are there not more important financial goals that need to be accomplished with your money than paying off low-rate, tax-deductible debt?
I am often asked this question, by reporters more than the 99% of us in the trenches admittedly, yet I think it is a valuable line of thinking:-
The interest up to $1,000,000 of mortgages and an extra $100,000 of Home Equity Debt is still tax deductible on most taxpayers’ income tax return. Here’s how you calculate how much you’re saving: take the interest paid on that mortgage and multiply it by your income tax bracket and the total is what you can can write off your taxes. (Assuming you itemize deductions.) So, that mortgage or home equity payment remains a good write-off opportunity.
Let’s put real numbers in here — if your mortgage rate is 5%, and your income tax bracket is 30%, you will be able to save 1.5% interest. This makes the true cost to the homeowner for that mortgage a mere 3.5%. Where else can you get a roof over your head and all the benefits of home ownership for 3.5%? In other words, because of the income tax deduction, mortgage money is ‘cheap’ debt, and it gets ‘cheaper’ the higher your tax bracket. So, instead of paying EXTRA each month for example, re-route that extra cash flow into your long-term investment portfolio, thereby effectively using ‘cheap’ debt to your advantage.
Debt in and of itself is neither good or bad; it’s all in how your manage it.