This is the second part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth.” This review began here.
Edelman recommends keeping your mortgage, making the minimum payments, and investing any extra money you have even if you’re able to pay off your mortgage. The main support he gives for this advice is that many of his wealthy clients keep their mortgages.
Any time you borrow to invest, you are said to be using leverage, and this increases your investment risk. It stings any time your investments drop in value, but the sting is worse if their value drops below the amount you owe.
This idea of leverage is similar to the leverage you may have used as a kid on the teeter-totter. I remember pulling my side out to make it longer than the other side so that I could control the movement even if the other kid was heavier. I could make him go way up more easily. With a well-timed hard push I could also make him crash into the ground more easily. It works the same way when using financial leverage; the ups and downs get magnified.
Keeping your mortgage maxed out for decades may make sense for some people, but is definitely not for everyone. One thing is sure, though: following this advice will give people more money to invest and will increase the size of the commissions financial advisors get, including Edelman’s financial planning firm.
This advice makes more sense for Americans who can deduct mortgage interest on their taxes than for Canadians who cannot. However, Canadians with equity in their homes who are determined to borrow to invest can read this essay on the “Smith Manoeuvre” for writing off loan interest on their taxes.
In part 3 of this review, we look at Edelman’s view of market indices and index funds.