What’s the probability of getting 3 heads in a row when tossing a coin?
1 in 8 or 12.5%. Not that hard a question.
What’s the probability of getting rich by selling Tupperware in one of those pyramid selling schemes?
Unknown but probably slim to none.
What return on investment will you get after 5 years of investing $10,000 in the Vanguard Australian Index Fund?
Again, unknown but probably anywhere from -20% to +20% annually.
Each of these questions all give you varying odds for various situations yet there’s one situation where if you put money towards it, you get a 100% guarantee that what you want to happen will happen and that’s quite rare when dealing with money. That situation is of course putting money towards paying off your mortgage.
Now normally in economics there are all sorts of things that affect the market. Currency rates, political situations, wars, new technologies etc, all of them will influence the valuation of companies and their income streams which then determines their worth. This fluctuation makes many things to do with money very uncertain, the riskier things are though the higher the rewards (most of the time anyway). When it comes to paying off your mortgage though there is no risk. With the very unlikely exception of the entire nations economic and political infrastructure collapsing you have a 100% probability that when you pay down your mortgage debt, you will be that much closer to being debt free.
Whilst this might sound like stating the obvious to most people it should be seen as quite a valuable thing. You see, you can save up for years and commit $100,000 towards a business and have that business completely fail sending you right back to square one. However when it comes to paying off your mortgage that never happens. If you pay off $100,000… you are $100,000 closer to being debt free. A bad thing can’t “happen” and you go back to still owing that $100,000… that $100,000 debt is gone forever. This type of guarantee is such a rare thing when dealing with money that I firmly believe everyone should use it as much as possible.
If you only have $15,000 to spend on something you won’t get any more of a sure bet than paying off $15,000 worth of your debt. Many people see it as making a “reverse investment” in fact. For instance if you are paying 5% on your home loan and you pay $100,000 off, that’s 5% of interest ($5,000 each year) you no longer have to pay. That’s just as good as if you still had that $100,000 worth of debt and someone gave you $5,000 each year. In fact it’s better as when anyone gives you $5,000 it’s counted as income and you get taxed on it!
Paying off debt is a very special thing monetarily speaking. There is never any risk involved. There’s no extra tax involved. And finally there are many positive reasons to do it to including more financial stability, less mental pressures and a sense of accomplishment. Whilst it might not be the most exciting business decision you make in your life I can almost guarantee it has the best probability of doing what you intend it to do and that’s something really worth considering and appreciating each time you make a payment.