Iimagine this scenario: you just received a large lump sum, perhaps through an inheritance. Now comes the question: is it better to use this money to pay off your mortgage and/or your debt or to invest it? The answer depends on several factors, according to financial adviser Jason Andrew with FSO financial services. “Everyone is different,” he says. “There is no cookie-cutter solution that everyone fits into. When it comes to financial planning, we believe in and operate with a philosophy of adapting strategies to meet the specific needs of each individual.
Andrew, who is part of the Olympia Federal Savings family, works with community members and small businesses to pursue their investment goals. In the scenario above, he looks at interest rates, a client’s debt type, risk tolerance, and long-term goals.
In some cases, keeping the money and investing it is the best option. Mortgage interest rates have dropped significantly since the 1980s, when 12% to 14% loans were common. Today, the rates are closer to 4%. If clients find an investment that pays 4.5% to 5% every month, they can use that money to make their mortgage payments while keeping the principal funds intact. “Now you have the liquidity of the money in case you need it,” Andrew explains, “whereas if you put it in the mortgage, you’ve locked it in and don’t have access to it if you need it.” other needs or opportunities arise.”
For example, if a customer has $300,000 in bonds and a monthly mortgage payment of $1,500, the bond dividends will pay the mortgage. “They can use the extra amount for other living expenses and that $300,000 stays within that range,” says Andrew.
At the other end of the spectrum, some customers are locked into mortgages with higher interest rates and unable to refinance. Others might be struggling with credit card debt. “If you have a loan at 7% or can’t find an investment that will give you that rate of return, it makes sense to pay off the mortgage,” says Andrew. “You don’t get as much out of your investments as the outflows on interest payments on loans.”
He remembers a couple who had credit card debt of about $60,000 at an interest rate of 22% and $50,000 remaining on their mortgage at 6.5%. When they had money, the reasonable choice was for them to pay off the credit card and the loan. “They were able to pay off all their debts and not have that lingering on them anymore,” Andrew says. “They hated debt, to begin with, but they got stuck. It was a perfect way for them to be able to start fresh on the savings and investment side by using the money that was once allotted to them for payment of their high-interest debts.
Once clients are debt-free, Andrew advises them to take the same amount they would normally spend on their mortgage and invest it rather than spend it. “It’s really hard for people to do, but that’s what we recommend,” he explains. “If you had a mortgage payment of $1,200, try setting aside $1,200 to save and build your investment pool instead of having additional expenses.”
He explains the concept of dollar cost averaging, a strategy in which investors divide the total amount to be invested into periodic purchases of a target asset and make automatic payments regardless of how the market moves. This reduces market volatility on the overall buy. “It evens out the ride,” says Andrew. “If I have $500, that money is invested in an investment on the fifth of every month, regardless of the price.”
Andrew also clarifies the various investment options available to clients, particularly those who may be new to the market. “With stocks, you buy a piece of ownership in a specific company,” he notes, “whereas if you buy a mutual fund, you buy shares in a fund made up of a diverse number of actions. Some mutual funds are designed by industry or line of business. For example, if you are considering mutual funds with large cap stocks [i.e., stocks in companies with a market value of more than $10 billion] they will then be made up of stocks of companies such as Walmart and Boeing and the type of companies that are in the S&P 500. Other mutual funds are designed based on risk tolerance or investment time horizons ( i.e. when you plan to retire). With mutual funds, you get the benefits of investment diversification as well as low-barrier entry into a professionally managed portfolio of securities.
The type of investment Andrew recommends depends on each client’s risk tolerance, goals and objectives. “For some retirees, their primary focus may be capital preservation, while others who are younger and saving for the future may be more focused on growth. Each person needs a personalized plan to meet their best interests,” he says.
For anyone debating whether to pay off a mortgage or invest, Andrew recommends scheduling a free, no-obligation review, where he can provide a comprehensive assessment and outline the options available to them. To schedule an appointment, you can call 360.596.9788 or email [email protected] Learn more by visiting the OFS Financial Services Website.
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Located at: 303 Cleveland Ave SE, Suite 201, Tumwater, WA 98501 • 360.596.9788
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Cost averaging does not guarantee a profit or protect you against losses, but it can lower your average cost per share in a fluctuating market.