If you have a mortgage, you give the monthly payment to the bank, paying them hundreds of thousands of dollars in

interest of a 30-year period ** right**?

##### Calculate the mortgage cost here…

Amortization Calculator

If you pay cash, your potential investment, is no longer earning you *any* interest. You lose hundreds of thousands in seed money that could cost you millions later. With compound interest, you receive interest on interest. So if you invest instead of paid cash for a long period, the value of the investment grows very rapidly after a few years.

(A little help) When putting in an interest rate–The stock market has returned 7% annually since 1950 and was actually 18% between 1982-1999! Be conservative. My financial planners confidently expect a 6% * TAX FREE* return. If you want to pay taxes on your earnings, data suggests 7%.

##### Calculate how much you can earn here…

Compound Interest Calculator

That’s a big difference!

##### When considering how much to put down on a house use the links above.

Only enter the amount you will ** KEEP **instead of put down into the loan amount and initial investment box. Call us or use our APP to get mortgage rates CLICK HERE. And use your judgement based on the information on this page for an investment rate of return.

Here is an example: I am curious if I should put an additional $50,000 down on my house or keep it and build wealth.

##### Amortization inputs

$50,000.00 loan amount

4.5% rate

$253.34 monthly payment

$91,204.32 over 360 payments

$41,204.32 in interest

##### Compound Interest Inputs:

$50,000.00 initial investment

6% rate of return

$0 monthly investment

$287,174.56 over 30 years

$237,174.56 in interest

What’s the difference? Did you get $195,970.24? That is a lot—but **you made a mistake**. The total is ACTUALLY $245,970.24. You have $50,000.00 that you paid back in the house—it is just in a bad place, earning you no interest and being eroded by inflation–but it is still yours.

Let’s do one more. Let’s say you **didn’t** keep the money to invest, but decided you were going to **invest the $253.34 each month** that you were “saving” because somehow you decided that was a better idea. (We see this a lot when we are refinancing clients and they are saving $250 per month. First they say they will invest it but never do, and second, if they were planning on investing they should just take the dead equity out of the house and keep the payment the same. *(That’s what the affluent do.)* How do you figure that out?

Easy:

$.00 initial investment

6% rate of return

$253.34 monthly investment

$91,202.40 personally invested

$248,084.83 over 30 years

$156,882.43 in interest

##### Hmm. It took nearly twice the personal investment to make $39,089.73 less.

Maybe it is not such a good idea.

##### Additional links to good information

Inflation is a killer. In order to keep inflation from steadily gnawing away at your money, it’s important to invest it in ways that can reasonably be expected to yield at a greater rate than inflation. We will never know how much it will hurt us, but we can look back to see how it affected money in the past.

##### Calculate how inflation decomposes your savings here…

**Average Stock Market Return: Where Does 7% Come From?**

Per Trent Hamm from the Simple Dollar,

Whenever I talk about investing in stocks, I usually suggest that you can earn a 7% annual return on average. That percentage is based on a few assumptions.

First, I’m assuming that you’re investing for longer than ten years. That’s because in a given year, the stock market is very volatile. Some years see an enormous dip in the stock market, like 2008, when many investments saw a 40% loss. Other years see gains much larger than 7%. It’s only over a longer period that you begin to approach that steady 7% average.

Second, I’m assuming that you’re investing in something that’s very broad-based, like the Vanguard Total Stock Market Index. That 7% return doesn’t apply if you’re just invested in the stocks of one company or just a few companies. Those investments are simply far too volatile.

But where does that 7% number come from?

My primary source for that number comes from Warren Buffett, who claims point-blank that you should expect a 6-7% annual return in the stock market over the long term. In that article, Buffett describes the analysis that led him to that kind of conclusion:

*“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”*

Didn’t the stock market do far better than that in the past?

*“The Standard & Poor’s 500 Index, a benchmark for U.S. stocks, surged 18 percent a year on average from 1982 to 1999. The bull market tainted investor expectations, Buffett said. Polls in the late 1990s showed some investors expected stocks to gain 14 percent to 15 percent a year, he said.*

*“‘Thinking that in a low-inflation environment is dreaming,’ he said.”*

Beyond that, the long-term data for the stock market points to that 7% number as well. For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%. Check the data for yourself.

Based on these two things – the raw historical data and the analysis of Warren Buffett – I’m willing to use 7% as an estimate of long-term stock market returns.

Still, there’s one big problem. **Past performance is no indication of future results.** That simple statement is true of any investment. It’s true of almost anything in life.

We can’t anticipate what the future holds. Some people project the latter part of this decade holding an American economic renaissance thanks to our burgeoning energy independence and our long period of low interest loans funding rapid business growth. Others see economic doom in our future.

Nothing is a sure bet. All we can do is put ourselves in the best position we can. For me, that means diversification, with part of that diversification coming in the form of index funds held over the long term.