Zero-risk vs. risk investments - apples and oranges
Let’s say you have $1 million in the bank. Why would you take out $300,000 to buy a house, instead of just making a 20 percent down payment and keeping the rest of the money in mutual funds to make more money? If need be, I could still pay off the house.
Dear Dave,
Let's say you have $1 million in the bank. Why would you take out $300,000 to buy a house, instead of just making a 20 percent down payment and keeping the rest of the money in mutual funds to make more money? If need be, I could still pay off the house.
Alex
Dear Alex,
Interesting question. Okay, I'm game.
The spread that you'd make between even a high-interest rate mortgage — let's say six percent — and mutual funds at 11 percent or so, is about five percent. And that's assuming nothing goes wrong, and you can get your mutual fund out if needed.
What you're talking about is theory, and what I'm talking about is actual life. In your theory you've left out two major issues: paying taxes on the mutual fund, which would make your yield less, and risk. You've compared a zero-risk investment with a risk investment, and you shouldn't do that. You must factor in risk so you can accurately compare one investment to another.
Every time you pay off a mortgage, the bank no longer charges you interest. That's zero risk compared to a mutual fund, which does have risk. Remember, if your house was paid for you wouldn't borrow $300,000 against it to invest in mutual funds!
-Dave
Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.
because a river that empties into Tampa Bay runs behind my home. Currently, I’m paying $1,070 a month for flood insurance. My house is worth $325,000, and water has only come up into
the yard twice in over 20 years. Since I’m doing pretty well financially, do you think I need to keep my flood insurance policy?
Trudy
Dear Trudy,
From what you’ve told me about the history of your property, it sounds like your biggest concern might be if a hurricane caused a backwash in your area. Insurance is already pretty
tough in Florida when it comes to those kinds of things, but you don’t want to run the risk of your house getting mowed down and losing everything.
If I were in your shoes, I think I’d like the protection of flood insurance. What you’re paying for the policy is such a small percentage of your world, compared to the value of your
home and your income. Keep the coverage, Trudy!