Is It Smart To Pay Off Mortgage Early?

There is nothing more financially satisfying than being debt-free. For most people, a mortgage is the largest debt that they carry throughout their life, and it is a burden that they probably would be quite happy to get rid of. In fact, knowing that you own your house outright would probably lead to one of the most surefire feelings of financial security possible.

But there are some drawbacks to consider. You should only consider making extra payments on a house if you have a large amount of cash on hand, because if you lack liquidity, you could lose everything in a recession. Let's say you can afford to spend $2000 on house payments each month on a $1500 mortgage. If you throw that extra money into the house, and find yourself laid off in the coming years and unable to make a house payment, than you will run into quite a bit of trouble if the bank doesn't give you a home equity line of credit, and instead chooses to foreclose on your home. Instead, I recommend that you use the extra $500 a month to invest in blue-chip stocks and use the income it throws off to go towards an additional house payment. Think of it like this--that extra $500 a month, or $6000 a year, would give you $180 in dividends that you could use to go towards the house payment.

That way, if you do find yourself in dire straights at some point in your life, you could simply sell off the stocks to meet your needs. If you have to rely on your house as a piggy back, you could find yourself in for a nasty surprise. 

The Stock Market And Your Nest Egg

If you are a stock investor, there is no time that you are at the mercy of the stock market quite like during your retirement. After all, if you buy shares of Coca-Cola during your 20s, 30s, or 40s, you can weather a stock market crash. All you have to do is hold your shares steady, reinvest the dividends, and then coming out owning more Coca-Cola stock once the economy improves. But, if the stock market crash of 2008 coincides with your retirement, then you do not have that luxury.

Let’s try this hypothetical example. You decide to invest in General Electric during the 1970s. After all, it’s a stodgy blue-chip that has been delivering excellent returns to its investors for over a century. Seems like a no-brainer, right? And then Jack Welch runs the company phenomenally well during the 1990s and early 2000s, as you pad yourself on the back for making such an outstanding investment. And let’s say you continued to hold the General Electric (GE) stock after you retired at the end of 2007. When the recession hit in 2008, the stock completely tanked, falling to as low as $6. And if you were relying on GE dividends to fund your retirement lifestyle, you would be incredibly disappointed to know that they reduced their dividend payments by over 75% during the recession. If you were relying on GE dividends to pay for your retirement, you would be out of luck—a very poor consolation for a lifetime of sedulous investing.

The moral of the story is to diversify your investments, and if a severe recession hits during part of your retirement, you should adjust your withdrawals to the best of your ability to make out only enough money so that you can ensure that you never run out of funds. 

Why You Should Buy Dividend Stocks

There are two big reasons why you should buy strong dividend-paying stocks. First of all, a stock that pays a dividend has to have the cash on hand. They can't fake it. If a company is paying out 50-60% of its earnings as dividends to shareholders, then they can't rely on bogus accounting to get through tough times like Enron and Worldcom attempted to do. By virtue of paying a dividend alone, a company has to stay focused and disciplined, making sure that it always has the cash on hand to fulfill its obligations to shareholders.

Another important reason why you should consider purchasing dividend paying stocks is because it enables you to purchase additional shares during recessions. Of course, this assumes that you are reinvesting your dividends instead of electing to take the cash payouts. Let's say you own 1000 shares of Coca-Cola. During the recession, the price of Coke fell to about $40 per share. Because your 1000 shares earn $470 every three months, you could plow that money into $40 shares, which would be worth much more once the recession clears. Those $40 shares that you were able to buy with reinvested dividends during the recession are now worth just shy of $70. Not a bad investment.

The folks over at The Intelligent Speculator wrote a fantastic article about the philosophical approach that one should take toward purchasing dividend paying stocks, and I highly recommend that you visit their website by clicking here: http://www.intelligentspeculator.net/investment-talking/how-to-build-a-sustainable-dividend-portfolio/ .

How Realistic Is It To Win The Lottery

How cool would it be to win $100 million dollars? Heck, $10 million? I bet you're thinking that even $1 million dollars would be nice. I'm sure almost every American has entertained romantic visions of winning the lottery--the prospect of buying a $1 ticket that creates millions of dollars in wealth, taking care of you for life. It's a nice concept. Too bad, it probably won't be you. After all, the odds of getting in a car accident on a given day is about 1 in 250,000. The odds of winning the lottery? One in about 160 million. Not odds you'd want to bet on. But yet, that is exactly what millions of Americans do each week when they purchase a lottery ticket at their local grocery store or gas station. It's a shame considering that winning the lottery doesn't even guarantee financial success. Millions of Americans who have won the lottery have ended up broke, bankrupt, and in a far worse position than they were before they won the money. But yet, millions of Americans continue to dream on, spending $5 a week on lottery tickets. It's sad, really. If they would take that $5 a year, which equals $20 a month, and put $240 into Berkshire Hathaway for 30+ years, they'd be in much better shape than if they had bought worthless lottery tickets. To read a fascinating article on the futility of winning the lottery, be sure to check out Trent's article at The Simple Dollar, link here: http://www.thesimpledollar.com/2011/07/06/why-the-lottery-isnt-the-answer-to-your-problems/

Setting Dividend and Other Financial Goals

The Passive Income Earner just put out an excellent post about maintaining ambitious financial goals as you grow older and hopefully more affluent. Although no one's income throughout life matches a perfect arc, hopefully you're making more money when you're 35 than when you're 25, and hopefully you're making more when you're 55 than when you're 45. And it's easier to let the increase in income lead to you consume higher-end items and allow lifestyle inflation to creep into your life. While there is nothing wrong with this per se, it does not allow you to build passive wealth via dividend paying stocks. Instead of allowing yourself to spend $200 more on frivilous crap as your salary grows, get in the habit of constantly putting money aside and building wealth via dividend stocks. If you can get just 3% annually from your dividend stocks, that means that each $200 contribution will throw off $6 in income each year while you sit on your rear end, not touching your principal investment for the rest of your life. If you can get in the habit of regularly collecting this $6 for life annual income streams, and do this year in and year out for several decades, you will wake up one morning to find yourself quite rich. If you want to read the great piece at The Passive Income Earner, be sure to visit the site here: http://www.thepassiveincomeearner.com/2011/06/financial-freedom-at-45.html .