query: Put-Call parity - what is the difference between the two representations?

positive: "Well, the first one is based on the ""Pert"" formula for continuously-compounded present value, while the second one is the periodically-compounded variant.  Typically, the continuously-compounded models represent the ideal; as the compounding period of time-valued money shrinks towards zero, and the discount rate (or interest rate if positive) stays constant over the time period examined, the periodic equation's results approach that of the continuously-compounded equation. Those two assumptions (a constant rate and continuous balance adjustment from interest) that allow simplification to the continuous form are usually incorrect in real-world finance; virtually all financial institutions accrue interest monthly, for a variety of reasons including simpler bookkeeping and less money paid or owed in interest. They also, unless prohibited by contract, accrue this interest based on a rate that can change daily or even more granularly based on what financial markets are doing. Most often, the calculation is periodic based on the ""average daily balance"" and an agreed rate that, if variable, is based on the ""average daily rate"" over the previous observed period. So, you should use the first form for fast calculation of a rough value based on estimated variables. You should use the second form when you have accurate periodic information on the variables involved. Stated alternately, use the first form to predict the future, use the second form in retrospect to the past."

negative: What you are asking about is called Interest Rate Parity. Or for a longer explanation the article Interest Rate Parity at Wikipedia.  If the US has a rate of say zero, and the rate in Elbonia is 10%, one believes that in a year the exchange rate will be shifted by 10%, i.e. it will take 1.1 unit of their currency to get the dollars one unit did prior.  Else, you'd always profit from such FOREX trades.  (Disclaimer - I am not claiming this to be true or false, just offering one theory that explains the rate difference effect on future exchange rates.

negative: There's a concept called interest rate parity, which sort of says that you cannot profit on the difference in interest rates. This difference accounts for the predicted movement in exchange rates as well, along with the stability of the currencies.

negative: "So, if an out-of-the-money option (all time value) has a price P (say $3.00), and there are N days... The extrinsic value isn't solely determined by time value as your quote suggests. It's also based on volatility and demand. Here is a quote from http://www.tradingmarkets.com/options/trading-lessons/the-mystery-of-option-extrinsic-value-767484.html distinguishing between extrinsic time value and extrinsic non-time value: The time value of an option is entirely predictable. Time value premium declines at an accelerating rate, with most time decay occurring in the last one to two months before expiration. This occurs on a predictable curve. Intrinsic value is also predictable and easily followed. It is worth one point for every point the option is in the money. For example, a call with a strike of 30 has three points of intrinsic value when the current value of the underlying stock is $33 per share; and a 40 put has two points of intrinsic value when the underlying stock is worth $38. The third type of premium, extrinsic value, increases or decreases when the underlying stock changes and when the distance between current value of stock and strike of the option get closer together. As a symptom of volatility, extrinsic value may be greater for highly volatile underlying stock, and lower for less volatile stocks. Extrinsic value is the only classification of option premium that is unpredictable. The SPYs you point out probably had a volatility component affecting value. This portion is a factor of expectations or uncertainty. So an event expected to conclude prior to expiration, but of unknown outcome can cause theta to be higher than p/n. For example, a drug company is being sued and the outcome of a trial will determine whether that company pays out millions or not. The extrinsic will be higher than p/n prior to the outcome of the trial then drops after.  Of course, the most common situation where this happens is earnings. After the announcement, it's not unusual to see a dramatic drop in the extrinsic portion of options. This is why sometimes a new option trader gets angry when buying calls prior to earnings. When 'surprise' good earnings are announced as hoped, the rise is stock price is largely offset by a fall in extrinsic value giving call holders little or no gain! As for the reverse situation where theta is lower than p/n would expect? Well you can actually have negative theta meaning the extrinsic portion rises over time. (this statement is a little confusing because theta is usually described as negative, but since you describe it as a positive number, negative here means the opposite of what you'd expect).  This is a quote from ""Option Volatility & Pricing"". Keep in mind that they use 'positive' theta to mean the time value increases up over time: Is it ever possible for an option to have a positive theta such that if nothing changes the option will be worth more tomorrow than it is today? When futures options are subject to stock-type settlement, as they currently are in the United States, the carrying cost on a deeply in-the-money option, either a call or a put, can, under some circumstances, be greater than the volatility component. If this happens, and the option is European (no early exercise permitted), it will have a theoretical value less than parity (less than intrinsic value). As expiration approaches, the value of the option will slowly rise to parity. Hence, the option will have a positive theta. Sheldon Natenberg. Option Volatility & Pricing: Advanced Trading Strategies and Techniques (Kindle Locations 1521-1525). Kindle Edition."

negative: "This does not apply to Roth IRAs. It defines the difference between the two depending on what your age is when this happens. If you are 59 or younger, you have a 10% penalty in addition to taxes. If you are between 59.5 and 70, there is no penalty, but you do have to pay taxes. If you are 70.5 or older, then you MUST withdraw money, and that withdrawal is called the ""required minimum distribution"" and you pay taxes on it as if it were income.  In terms of investments, the two are the same in that the earnings you make on your investments grow tax free.  Here is more information between the two.  *Improvements are welcome for my answer."

negative: "The key term you're looking for is ""purchasing power parity"", which considers the local prices of goods and services when making comparisons between countries. For example, you can look up the GDP by PPP per capita to get a sense of much people on average incomes can buy in each country. Of course, average incomes may not be too relevant to your own specific circumstances, but nonetheless you can look at the PPP data itself to figure out how to translate specific numbers between two currencies. However, note that the ""basket"" of goods used to calculate this measure itself has a significant impact on the results. Comparing prices of food and electronic equipment respectively will often give very different answers."

negative: Let's start with a definition: A Collar is a protective strategy for a position in the underlying instrument created by purchasing a put and selling a call to partially pay for the put option purchased or vice versa. Based on that definition, there are two different types of collars. Each is a combination of two simpler strategies: References Multi-Leg Options Orders

negative: You should also consider what the cost of the Put is, especially if the strike price is set at the current price, vs the average price delta of the security during the period between when you buy the put, and the expiration date.  Also note the prices for puts on stocks with a lot of price volatility. There are a good number of situations where you may come out behind. If the stock stays the same price, you are out the premium you paid for the put. If the stock price rises less than the premium, you are out the difference between the two. If the stock price falls less than the premium, you are out the difference between the two. In order to be 'in the money' when writing a protective put, the stock has to either rise more than the premium you paid for the put (and you MUST sell, or hold and write off the expense of the put) or the stock price has to fall below the strike price to a level lower  than the premium you paid, and you must SELL via the exercising the option. and you've protected yourself from a loss (presuming you were going to sell and not hold and see if the stock recovers.  And since selling is required in both cases, if you've held the stock less than a year, then pay on any profits at short term rates (taxed as regular income) and if the price went down, you can't claim any loss (unless strike price was below your buy price), and would still need to pay if you had a net gain, and you likely can't deduct the price you paid for the put.

negative: "**Big Mac Index**  The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. It ""seeks to make exchange-rate theory a bit more digestible"".  The index, created in 1986, takes its name from the Big Mac, a hamburger sold at McDonald's restaurants.  ***  ^[ [^PM](https://www.reddit.com/message/compose?to=kittens_from_space) ^| [^Exclude ^me](https://reddit.com/message/compose?to=WikiTextBot&message=Excludeme&subject=Excludeme) ^| [^Exclude ^from ^subreddit](https://np.reddit.com/r/finance/about/banned) ^| [^FAQ ^/ ^Information](https://np.reddit.com/r/WikiTextBot/wiki/index) ^| [^Source](https://github.com/kittenswolf/WikiTextBot)   ^] ^Downvote ^to ^remove ^| ^v0.24"

negative: Wealth is not what you earn, nor is it what you spend. It's the difference between those two.

negative: "Old question I know, but I have some thoughts to share. Your title and question say two different things.  ""Better off"" should mean maximizing your ex-ante utility.  Most of your question seems to describe maximizing your expected return, as do the simulation exercises here.  Those are two different things because risk is implicitly ignored by what you call ""the pure mathematical answer.""  The expected return on your investments needs to exceed the cost of your debt because interest you pay is risk-free while your investments are risky. To solve this problem, consider the portfolio problem where paying down debt is the risk-free asset and consider the set of optimal solutions.  You will get a capital allocation line between the solution where you put everything into paying down debt and the optimal/tangent portfolio from the set of risky assets.   In order to determine where on that line someone is, you must know their utility function and risk parameters.  You also must know the parameters of the investable universe, which we don't."

negative: "There are two places to start, the spending side and the income side. Many (in the personal finance blogosphere) have pointed out that frugal has its limits. You can only live so cheaply, eat so little, turn the heat down so much.  Your income and your wife's income has no limit. Not to put this all in her lap, but why isn't she working? Between the two of you, there are hundreds of things you can consider doing that will generate a few hundred dollars a week extra income.  You said ""we can live fairly comfortably paycheck-to-paycheck and routinely put some money into savings,"" but you are still paying off debt, and don't have the emergency fund to handle the routine things that come around on a regular basis. The difference between breaking even, and making extra money, is the ability to fund that account. It's important to have a defined plan to pay the remaining debt, and build your fund in as short a time period as you can.  As Bren stated, you need to plan for the unexpected. I don't know what appliance will go this year or what day it will break, I just know something will happen and I have the funds to pay for it. The extra income is vital to a workable plan."

negative: "Both are saying essentially the same thing.  The Forbes articles says ""as much as 20% [...] up to a maximum of $50,000"".  This means the same as what the IRS page when it says the lesser of a percentage of your income or a total of $53,000.  In other words, the $53k is a cap: you can contribute a percentage of your earnings, but you can never contribute more than $53k, even if you make so much money that 20% of your earnings would be more than that. (The difference between 20% and 25% in the two sources appears to reflect a difference in contribution limits depending on whether you are making contributions for employees, or for yourself as a self-employed individual; see Publication 560.  The difference between $50k and $53k is due to the two pages being written in different years; the limits increase each year.)"

negative: "In Orange County (southern California), one agent has blogged pretty extensively about using rental parity to determine when it is time to rent or buy. Rental parity is achieved when the cost of renting is equal to the cost of owning; in theory, if you buy when a home is selling above rental parity, you're overpaying, and you'd be better off renting. He has many posts on the subject; a few you might care to read would be this one, and this other one. You might get a better sense of how to calculate rental parity by looking at an example or two. There is also the NY Times calculator mentioned in other responses, and the Patrick.net calculator. Be aware, the calculators are garbage in, garbage out. In other words, you have to consider the input carefully. In particular, I found the defaults on the Patrick.net calculator were not realistic. So far as I am aware, the agent at OCHousingNews does not make his calculations public (though I have never actually asked). He's using a spreadsheet which I have never seen. That is another option, if you care to do this kind of analysis yourself. Search around, you can find a spreadsheet that someone has posted here and there. But keeping something like that updated is not trivial. In my experience, in practice, it's difficult to be totally rational and mathematical when it comes to many decisions, and as other respondents have noted, where you live is one of those decisions. Too, saying ""buy when rental parity is achieved"" is sort of like saying ""buy low, sell high,"" as though it were perfectly clear when stocks are at a bottom and/or a peak. In our case, we bought a house about 12 years ago, before rental parity was being discussed in the blogsphere. Looking back, we supposedly bought at the wrong time, according to that agent's rating system, but it turned out fine for us. Our house has appreciated, whereas the S&P 500 is basically where it was 12 years ago. Had we been thinking in terms of rental parity, we might not have bought at that time. Of course, your mileage may vary, and hindsight is always 20/20. I think the most helpful advice I can offer was something I got from a real estate agent around the time we were looking. He told me ""when you're looking at houses, be sure you like the floor plan and the location, because those two things are not easily changed."" That advice really helped us to see things more clearly."

negative: >the flattening of the curve most likely results from a domestic unemployment figure that doesn’t capture global labour market competition  This.  We're not competing with ourselves when it comes to wages, we're competing with much lower living standards in other countries.  The result is stunted wage growth due to a huge vacuum existing between the consumer markets of the Developed and Developing countries: Wage growth is being absorbed by differences in purchasing power parity, resulting in almost deflationary pressure.  The effect on employment numbers means that unemployment can hit zero in one economy without inflationary pressure, because the slack can be picked up *in another economy*.

negative: Fundamentally, there are two differences between traditional and Roth: 1)  With traditional you pay the tax rate that's in effect when you draw it out, with Roth you pay the tax rate when you put it in.  Assuming the same tax rate this is a wash. 2)  As a Roth contains after-tax money this lets you put more in than you could with a traditional.  This is only a benefit if you are in a financial position to put more in, though.  If you can't come fairly close to maxing your contribution this gains you nothing.

negative: Option prices consist of two parts: the intrinsic value (the difference between the strike and the current price of the stock) and a time premium, representing the probability that the stock will end up above the strike for a call (or below for a put).   All else being equal, options decline in value as time passes, since there is less uncertainty about the expected value of the stock at expiration and thus the time premium is smaller.  Theta is the measure of the change in value in one day.  So for every day that passes, the calls you sold are going down by $64.71 (which is positive to you since you sold them at a higher value) and the calls you sold are going down by $49.04. So your position (a short spread) is gaining $15.67 each day (assuming no change in stock price or volatility). In reality, the stock price and volatility also change every day, and those are much stronger drivers of the value of your options.  In your case, however, the options are deep out of the money, meaning it's very likely that they'll expire worthless, so all you have left is time premium, which is decaying as time goes on.

negative: There are two ways to measure the value of money in the past. 1) As Victor mentioned there are inflation statistics covering the last 100 or so years that value the currency against an ever-changing basket of goods. This is sufficient when measuring general inflation over the period of the hundred years where there is data. This is how it was measured in your example. 2) For older time periods or where a value comparison is required between specific items (particularly where these were not in the basket of goods used for the inflation calculation) Historical records of the price of comparable goods can be used. This is in effect the same as mark to market valuations for illiquid financial instruments and requires poring through records to find the price of either a comparable basket of goods to one that would be used for inflation calculations today or a comparable set of items. An example of this is finding the value of a particular type of house (say a terraced house in London) in the 19th Century compared to the same house today by finding records of how much comparable houses would sell for, on average, then and now. This second measure is also used where the country in question didn't or doesn't keep reliable inflation statistics which may well be true of Colombia in the 90s. This means that there is a chance that this way of estimating Escobar's wealth in today's terms may have also been used. Another notable reason to use this methodology is that (unless you are using exchange rates in purchasing power parity terms) the value of money held in different currencies is different. This is even true today as the value of $1 in INR in India is likely to be higher than the value of a dollar in the US in terms of what you can buy. Using this methodology allows for a more accurate comparison in values where different countries and currencies are involved.

negative: In the majority of markets without the population density to support hailed cabs, you call the company for a ride (more commonly known as limo service). There's really no difference between that and using an app. I've never liked the differentiation between hailing and calling for a cab.

negative: Go with a TFSA before RRSP unless your wages put you in the top two tax brackets.  The promise that your tax rates will be lower in retirement is just a sales pitch.  You can see how this plays out with your own assumptions using the spreadsheet at http://www.retailinvestor.org/SaveInRRSPorTFSA.xls There are long list of differences between the accounts (see http://www.retailinvestor.org/rrsp.html#tfsa) but most all come down on the side of the TFSA unless you are a high roller.

negative: Seems like a good deal to me. You are paying less interest over the lifetime of the loan. And what I would do is take the difference between the new payments and the old, put it into a savings account each month, and when the savings account exceeds the balance of the loan pay it off.

negative: I think part of the confusion is due to the age of the term and how money has changed over time relative to being backed by precious metals vs using central banks etc. Historically: Because historically the coin itself was precious metal, if a change occurred between the 'face value' of the coin and value of the precious metal itself, the holder of the coin was less affected since they have the precious metal already in hand. They could always trade it based on the metal value instead of the face value. OTOH if you buy a note worth an the current price of ounce of gold, and the price of gold goes up, and then the holder wants to redeem the note, they end up with less than an ounce of gold. In the more modern age  The main concern is the cost to borrow funds to put money into circulation, or the gain when it goes out of circulation.  The big difference between the two is that bills tend stay in circulation until they wear out, have to be bought back and replaced.  Coins on the other hand last longer, but have a tendency to drop out of circulation due to collectors (especially with 'collectible series' coins that the mint seems to love to issue lately).  This means that bills issued tend to stay in circulation, while only a percentage of coins stays in circulation.  So the net effect on the money supply is different for the two, and since modern 'seigniorage' is all about the cost to put money in circulation, it is different in the case of coins where some percentage will not remain circulating.

negative: Value investing is an investment approach that relies on buying securities below their intrinsic values. There are two main concepts; one is the Intrinsic Value and the other is Margin of Safety.  Intrinsic value is the value of the underlying business - if we are talking about stocks - that can be calculated through carefully analyzing the business looking at all aspects of it. If there is an intrinsic value exists for a company then there is a price tag we can put on its shares as well. Value investing is looking to buy shares well below its intrinsic value.  It is important to know that there is no correct intrinsic value exists for a company and two people can come up with different figures, if they were presented the same data. Calculating the intrinsic value for a business is the hardest part of value investing.  Margin of Safety is the difference between the buying price of a stock and its intrinsic value. Value investors are insisting on buying stocks well below their intrinsic value, where the margin of safety is 20%-30% or even more. This concepts is protecting them from poor decisions and market downturns. It is also providing a room for error, when calculating the intrinsic value.  The approach was introduced by Benjamin Graham and David Dodd in a book called Security Analysis in 1934. Other famous investor using this approach is Warren Buffet Books to read:  I would start to read the first two book first.

negative: It definitely depends on your risk appetite as Joe Taxpayer pointed out in his answer. Covered calls are a good choice for someone who already own's the stock, because the premium collected reduces the cost basis for the position. The downside is that if the calls are exercised, there is a good chance that you are missing out on additional upside in the stock price (because the strike is obviously below the market value for the stocks).  Another good option trade is the spread option. This would allow you to capture the difference between the two strikes of the options in the spread. This is also one of the less risky choices because your initial cost an potential profit/loss are known in advance of entering the position.

negative: "My experience with different brands in the US this year is $250 and $400.  If this is the differential in you choosing a brand for a rental, best to call the reservation number for each contender and ask what their hold will be. I am not sure what a ""definitive"" answer would be.  There is a tension between ""risk mitigation"" and ""poisoning your brand reputation"" that each company will answer differently, and answer differently over time. Even an actuarial answer has to be transformed into company policy through competing soft factors."

negative: So what exactly is the difference between an ITT mill and a shitty public school? Because I am not really seeing one. How does one prove that a school is a mill? And why are only private colleges considered? I know of several public schools that may as well be called diploma mills.

negative: "There are two different types of ISA; the ""Cash ISA"" for cash savings, and the ""Stocks and Shares ISA"" for stock market investing.  You can transfer funds between these two different types of ISA.  If your current cash ISA provider does not provide stocks and shares ISAs, then there may be a fee involved when transferring funds between two different providers. If I am reading your notation correctly, you have contributed the full allowance of GBP15,240 in both the current tax year and the previous tax year.   Each year you can contribute GBP15,240 (currently) to your ISAs and this can be done in any combination of cash ISA and stocks and shares ISA.  For example, you could put GBP5,240 into your cash ISA and GBP10,000 into your stocks and shares ISA. Regarding your questions : It is also important to understand that once you withdraw money from an ISA, it does not affect your previous contributions or allowances.  For example, if you have used your full contribution allowance for the current year and chose to withdraw some funds, then you have still used your full contribution allowance and so you cannot redeposit these funds."

negative: I do this very thing, but with asset allocation and risk parity in mind. I disagree with the cash or bust answers above, but many of the aforementioned facts are valuable and I don't mean to undermine them in anyway. That said, let's look at two examples: Option 1: All-in For the sake of argument let's say you had $100k invested in the SPY (S&P 500 ETF) in early 2007, and you kept it there until today. Your lowest balance would have been about $51k, and at this point the possibility of you losing your job was probably at a peak. Today you would be left with $170k assuming no withdrawal. Option 2: Risk Parity BUT if you balanced your investments with a risk parity approach, using negatively correlated asset classes you avoid this dilemma. If you had invested 50% in XLP (Consumer Staples Sector ETF) and 50% in TLT ( Long Term Treasury ETF) your investments low point would have been $88k, and your lowest annual return would be +0.69%. Today you would be left with $214k assuming no withdrawals.  I chose option #2 and it hasn't failed me yet, even in 2016 so far the results are steady and reliably given the reward. My general opinion is simple: when you have money always grow it. Just be sure to cover your ass and prepare for rain. Backtesting for this was done at portfoliovisualizer.com, the one caveat to this approach is that inflation and a lack of international exposure are a risk here.

negative: This is what I'm planning on.  Retirement would be difficult, if not impossible, without the expected SS payments. In terms of current retirement planning, it's the difference between putting 20% of my income aside for retirement, and 35% of my income aside. It's one thing to keep the wealthy happy and tax free, it's another to deny 80% of the population something that they will have to have at some point.

negative: There isn't a difference - he/she likely meant to say the difference between sales and profit.    Sales, in this case, means the amount of money that a business receives from its customers.  Profit would be what is left after deducting costs (wages, product, etc.) from sales.  To put it another way:  Sales - Costs = Profit

negative: There are two basic issues here.  First, there is the difference between accounting terms and their dictionary definitions.  Second, once you dig into it there are dichotomies similar to put vs call options, long sales vs short sales, bond yield vs interest rate.  (That is, while they are relatively simple ideas and opposite sides of the same coin, it will probably take some effort to get comfortable with them.) The salient points from the Wikipedia article on debits and credits: In double-entry bookkeeping debit is used for increases in asset and expense transactions and credit is used for increases in a liability, income (gain) or equity transaction. For bank transactions, money deposited in a checking account is treated as a credit transaction (increase) and money paid out is treated as a debit transaction, because checking account balances are bank liabilities. If cash is deposited, the cash becomes a bank asset and is treated as a debit transaction (increase) to a bank asset account. Thus a cash deposit becomes two equal increases: a debit to cash on hand and a credit to a customer's checking account. Your bank account is an asset to you, but a liability to your bank.  That makes for a third issue, namely perspective.

negative: There are two main reasons for the difference between these two numbers: While there are a few people that are wildly wealthy, most of the people with more than 10 million have between 10-50 million dollars.  These people shield most of their estate and in the end the tax only effects a small portion of even the wealthy.

negative: "Wikipedia talks about the Chinese currency: Scholarly studies suggest that the yuan is undervalued on the basis of purchasing power parity analysis. so despite it appearing cheaper due to the official exchange rate, the price in China might actually be fair. There are also restrictions on foreign exchange (purportedly ""to prevent inflows of hot money""), which, in concert with any other legal obstacles to owning or trading on the Chinese exchange, may also explain why the high-frequency traders aren't tripping over each other to arbitrage away the difference."


query: Paying Off Principal of Home vs. Investing In Mutual Fund

positive: Excellent answers so far, so I will just add one additional consideration: liquidity. Money invested in a mutual fund (exclusive of retirement accounts with early withdrawal penalties) has a relatively high liquidity. Whereas excess equity in your home from paying down early has very low liquidity. To put it simply: If you get in a desperate situation (long term unemployment) it is better to have to cash in a mutual fund than try to sell your house on the quick and move in with your mother. Liquidity becomes less of an issue if you also manage to fund a decent sized rainy-day fund (6-9 months of living expenses).

positive: Naturally the advice from JoeTaxpayer and dsimcha is correct, every situation is different.  I will get reckless, go nuts and make a recommendation! You are young, childless for the time being.  Do the following with your money: ALTERNATE IDEA for #6 Fix yourself up for the long term first, then have a bit of fun, then get out of the house debt.  In that order.

positive: "I was going to ask, ""Do you feel lucky, punk?"" but then it occurred to me that the film this quote came from, Dirty Harry, starring Clint Eastwood, is 43 years old.  And yet, the question remains. The stock market, as measured by the S&P has returned 9.67%  compounded over the last 100 years. But with a standard deviation just under 20%, there are years when you'll do better and years you'll lose. And I'd not ignore the last decade which was pretty bad, a loss for the decade.  There are clearly two schools of thought. One says that no one ever lost sleep over not having a mortgage payment. The other school states that at the very beginning, you have a long investing horizon, and the chances are very good that the 30 years to come will bring a return north of 6%. The two decades prior to the last were so good that these past 30 years were still pretty good, 11.39% compounded.  There is no right or wrong here. My gut says fund your retirement accounts to the maximum. Build your emergency fund. You see, if you pay down your mortgage, but lose your job, you'll still need to make those payments. Once you build your security, think of the mortgage as the cash side of your investing, i.e. focus less on the relatively low rate of return (4.3%) and more on the eventual result, once paid, your cash flow goes up nicely.   Edit - in light of the extra information you provided, your profile reads that you have a high risk tolerance. Low overhead, no dependents, and secure employment combine to lead me to this conclusion. At 23, I'd not be investing at 4.3%. I'd learn how to invest in a way I was comfortable with, and take it from there.  Disclosure (Updated) - I am older, and am semi-retired. I still have some time left on the mortgage, but it doesn't bother me, not at 3.5%. I also have a 16 year old to put through college but her college account i fully funded."

positive: I wouldn't pay down your mortgage faster until you have a huge emergency fund.  Like two years' worth of expenses.  Once you put extra money toward principal you can't get it out unless you get a HELOC, which costs money.  You're in a position now to build that up in a hurry.  I suggest you do so. Your mortgage is excellent.  In the land of inflation it gets easier and easier to make that fixed-dollar payment: depreciating dollars. You seem like a go-getter.  Once you have your huge emergency fund, why not buy a few websites and monetize the heck out of them?  Or look for an investment property from someone who needs to sell desperately? Get a cushion that you can do something with.

positive: Paying off the debt is low-risk, low-reward.  You're effectively guaranteed a 4% return.  If you buy a mutual fund, you're going to have to take some risk to have a decent chance of getting better than 4% and change return in the long run, which probably means a fund that invests primarily in stocks.  Buying a stock mutual fund is high-risk, high reward, especially when you're in significant debt.  On the other hand, 4% and change is very low-interest.  If you wanted to buy stocks on margin, financing stock investments directly with debt, you'd pay a heck of a lot more.  Bottom line:  It comes down to your personal risk tolerance.

positive: Other answers are already very good, but I'd like to add one step before taking the advice of the other answers... If you still can, switch to a 15 year mortgage, and figure out what percentage of your take-home pay the new payment is.  This is the position taken by Dave Ramsey*, and I believe this will give you a better base from which to launch your other goals for two reasons: Since you are then paying it off faster at a base payment, you may then want to take MrChrister's advice but put all extra income toward investments, feeling secure that your house will be paid off much sooner anyway (and at a lower interest rate). * Dave's advice isn't for everyone, because he takes a very long-term view.  However, in the long-term, it is great advice.  See  here for more. JoeTaxpayer is right, you will not see anything near guaranteed yearly rates in mutual funds, so make sure they are part of a long-term investing plan. You are not investing your time in learning the short-term stock game, so stay away from it.  As long as you are continuing to learn in your own career, you should see very good short-term gains there anyway.

positive: The mathematically correct answer is to invest, because you'll get a higher rate of return. I think that answer is bunk -- owning your home free and clear is a huge burden lifted off of your shoulders. You're at an age where you may find a new job, business, personal or other opportunities will be easier to take advantage of without that burden.

positive: "I'm probably going to get a bunch of downvotes for this, but here's my not-very-popular point of view: I think many times we tend to shoot ourselves in the foot by trying to get too clever with our money. In all our cleverness, we forget a few basic rules about how money works: It's better to have 0 debt and a small amount of savings than lots of debt and lots of savings. Debt will bite you. Many times even the ""good"" mortgage debt will bite you. I have several friends who have gotten mortgages only to find out they had to move long before they were able to pay it off. And they weren't able to sell their homes or they sold at a loss. When you have debt, you are restricted. Someone else is always holding something over your head. You're bound to it. Pay it off ASAP (within reason) while putting a decent amount into a high-yield savings account. Only after the debt is gone, go and be clever with your money."

negative: By rounding my house payments up to the nearest $50.00, my 30 year mortgage was paid off in 7 years.  Initially, my mortgage payment was roughly $600, $50 going to principal and $550 going to interest (banker's profits). By paying $650, I was actually doubling the amount I was paying on principal.  Since interest is computed as a function (percentage) of the outstanding principal balance, the amount of my fixed payment that went to interest decreased each month, and the amount that went to principal increased. In 7 years I owned my home free and clear, and started putting the money I had been putting into the mortgage payments into investments. A rule of thumb I have discovered is that it takes half the time to save money to meet a goal that it takes to pay off the same debt.

negative: "I agree with @Pete that you may be well-advised to pay off your loans first and go from there.  Even though you may not be ""required"" to make payments on your own loan based on your income, that debt will play a large factor in your borrowing ability until it is gone, which hinders your ability to move toward home ownership.   If you are in a fortunate enough position to totally pay off both your loan and hers from cash on hand then you should.  It would still leave you with more than $112,000 and no debt, which is a big priority and advantage for a young couple. Mind you, this doesn't keep you from starting an investment plan with some portion of the remaining funds (the advice to keep six months' income in the bank is very wise) through perhaps a mutual fund if you don't want to directly manage the investments yourself.  The advantage of mutual funds is the ability to choose the level of risk you're willing to take and let professionals manage how to achieve your goals for you.  You can always make adjustments to your funds as your circumstances change. Again, I'd emphasize ridding yourself of the student loan debt as the first move, then looking at how to invest the remainder."

negative: Just sticking to equities: If you are investing directly in a share/stock, depending on various factors, you may have picked up a winner or to your dismay a loser. Say you just have Rs 10,000/- to invest, which stock would you buy?   If you don't know, then it’s better to buy a Mutual Fund. Now if you say you would buy a few of everything, then even to purchase say Rs 5000/- worth of each stock in the NIFTY Index [50 companies] you would require at least an investment of 250,000/-. When you are investing directly you always have to buy in whole numbers, i.e. you can't buy 1/2 share or 1.6 share of some stock.   The way Mutual funds work is they take 10,000 from 250 people and invest in all the stocks. There are fund managers who's job is to pick good stocks, however even they cannot predict winners all the time. Normally a few of the picks become great winners, most are average, and a few are losers; this means that overall your returns are average VS if you had picked the winning stock. The essential difference between you investing on your own and via mutual funds are:   It is good to begin with a Mutual Fund, and once you start understanding the stocks better you can invest directly into the equities. The same logic holds true for Debt as well.

negative: It looks like your Solo 401K loan will need to repaid in 5 years.  If you borrow too much in order to pay back in this time you run into the typical 401K loan risks, that it is considered a distribution.  Don't borrow more then can be repaid in that time. When you borrow money from your 401K, it is no longer invested in the market.  Lets assume  that you are borrowing at 6% or so, and your LOC is at 3.5%, and the mutual funds you are invested in are returning 9%.  You would be better off with the LOC.  As you are paying 3.5% but earning 9%.  Keep in mind with a LOC that is variable you have interest rate risk, where you don't really have that with the 401K loan. I think the 401K loan is riskier then you are allowing.  If you do not pay it back within the allotted time, you get nailed for 40% of the unpaid balance.  That is quite high.  With the HELOC, you can weather quite a few negative credit events without your home ever being in jeopardy.

negative: The breakdown between how much of your payment is going toward principal and interest is very important.   The principal balance remaining on your loan is the payoff amount.  Once the principal is paid off, your loan is finished.  Each month, some of your payment goes to pay off the principal, and some goes to pay interest (profit for the bank). Using your example image, let's say that you've just taken out a $300k mortgage at 5% interest for 30 years.  You can click here to see the amortization schedule on that loan.  The monthly payment is $1610.46. On your first payment, only $360 went to pay off your principal.  The rest ($1250) went to interest.  That money is lost.  If you were to pay off your $300k mortgage after making one payment, it would cost you $299,640, even though you had just made a payment of $1250.  Interest accrues on the principal balance, so as time goes on and more of the principal has been paid, the interest payment is less, meaning that more of your monthly payment can go toward the principal.   15 years into your 30-year mortgage, your monthly payment is paying $762 of your principal, and only $849 is going toward interest.  Your principal balance at that time would be about $203k.  Even though you are halfway done with your mortgage in terms of time, you've only paid off about a third of your house. Toward the end of your mortgage, when your principal balance is very low, almost all of your payment goes toward principal.  In the last year, only $513 of your payments goes toward interest for the whole year. You can think of your monthly loan payment as a minimum payment.  If you continue to make the regular monthly payments, your mortgage will be paid off in 30 years.  However, if you pay more than that, your mortgage will be paid off much sooner.  The extra that you pay above your regular monthly payment all goes toward principal. Even if you have no plans to pay your mortgage ahead of schedule, there are other situations where the principal balance matters.  The principal balance of your mortgage affects the amount of equity that you have in your home, which is important if you sell the house.  If you decide to refinance your mortgage, the principal balance is the amount that will need to be paid off by the new loan to close the old loan.

negative: The issue with trading stocks vs. mutual funds (or ETFs) is all about risk. You trade Microsoft you now have a Stock Risk in your portfolio. It drops 5% you are down 5%. Instead if you want to buy Tech and you buy QQQ if MSFT fell 5% the QQQs would not be as impacted to the downside. So if you want to trade a mutual fund, but you want to be able to put in stop sell orders trade ETFs instead.   Considering mutual funds it is better to say Invest vs. Trade.  Since all fund families have different rules and once you sell (if you sell it early) you will pay a fee and will not be able to invest in that same fund for x number of days (30, 60...)

negative: Oh, don't expect us to take sides, we love both our parents the same! As to the pragmatic decision making - simple math. The disagreement is whether to pay off the HELOC or to invest into the mutual fund instead. Well, check the yield of the fund, compare to the costs of keeping the HELOC balance, and see which one makes more sense. Just compare the expected payments and gains for each of the scenarios and you'll get your answer.

negative: "You need to do a bit more research and as @littleadv often wisely advises, consult a professional, in this case a tax layer or CPA. You are not allowed to just pull money out of a property and write off the interest.  From Deducting Mortgage Interest FAQs If you own rental property and borrow against it to buy a home, the   interest does not qualify as mortgage interest because the loan is not   secured by the home itself. Interest paid on that loan can't be   deducted as a rental expense either, because the funds were not used   for the rental property. The interest expense is actually considered   personal interest, which is no longer deductible. This is not exactly your situation of course, but it illustrates the restriction that will apply to you.  Elsewhere in the article, it references how, if used for a business, the interest deduction still will not apply to the rental, but to the business via schedule C.  In your case, it's worse, you can never deduct interest used to fund a tax free bond, or to invest in such a tax favored product.  Putting the facts aside, I often use the line ""don't let the tax tail wag the investing dog."" Borrowing in order to reduce taxes is rarely a wise move. If you look at the interest on the 90K vs 290K, you'll see you are paying, in effect, 5.12% on the extra 200K, due the higher rate on the entire sum. Elsewhere on this board, there are members who would say that given the choice to invest or pay off a 4% mortgage, paying it off is guaranteed, and the wiser thing to do. I think there's a fine line and might not be so quick to pay that loan off, an after-tax 3% cost of borrowing is barely higher than inflation. But to borrow at over 5% to invest in an annuity product whose terms you didn't disclose, does seem right to me. Borrow to invest in the next property? That's another story."

negative: justkt's answer lays out the opportunity costs aspect of your question pretty well.  But if I were in your position, extra payments on principal for a home I wasn't planning to retire in isn't the way I'd invest the money.  Housing prices are awful (hence the great deal on what you just bought), and given the number of foreclosures outstanding and the existing uncertainty over the legality of some of them, they're likely to remain awful for years.  Depending on the size of your monthly mortgage payment, if you've got that much free cash after expenses each month, I'd consider the following options instead: You could go with a non-qualified (no tax-deferral benefit) account for the cash emergency fund so you could put any amount above and beyond 3-6 months of living expenses into stocks, index funds, mutual funds, etc. All of these options have the advantage of being more likely to provide a positive return in the 5-7 year time frame.  The cash emergency fund option has the additional advantage of being more liquid than housing--regardless of the current economic environment.

negative: When you invest in an ETF or mutual fund, you're not investing in stocks or bonds. You're buying shares of a company that invests in stocks or bonds. This level of indirection is what makes it so bond funds do not 'mature.' Bonds inside of ETFs or mutual funds do have a maturity date. When they mature, the fund manager uses the principal value that is returned to purchase another bond that meets the investment objectives of the fund. So the fund never matures, since it is always investing in more bonds when the old ones mature. Unit investment trusts made of bonds do have a maturity date as well, since the portfolio does not change once the UIT is issued. As the individual bonds in the portfolio mature, the principle value is returned to investors. So the overall maturity date is effectively the maturity date of the last bond in the trust. All of the statements quoted above are accurate in explaining why there is no guarantee of a return of principle when investing in bond funds (ETF or open-ended mutual fund). The bonds they hold do mature, but are replaced within the fund as needed. The investor will never see it happen unless they watch the holdings reports filed by the funds.  The only way to have an assurance of the return of principle is to invest in individual bonds, or in unit trusts made up of bonds.

negative: For most people, you don't want individual bonds. Unless you are investing very significant amounts of money, you are best off with bond funds (or ETFs). Here in Canada, I chose TDB909, a mutual fund which seeks to roughly track the DEX Universe Bond index. See the Canadian Couch Potato's recommended funds. Now, you live in the U.S. so would most likely want to look at a similar bond fund tracking U.S. bonds. You won't care much about Canadian bonds. In fact, you probably don't want to consider foreign bonds at all, due to currency risk. Most recommendations say you want to stick to your home country for your bond investments. Some people suggest investing in junk bonds, as these are likely to pay a higher rate of return, though with an increased risk of default. You could also do fancy stuff with bond maturities, too. But in general, if you are just looking at an 80/20 split, if you are just looking for fairly simple investments, you really shouldn't. Go for a bond fund that just mirrors a big, low-risk bond index in your home country. I mean, that's the implication when someone recommends a 60/40 split or an 80/20 split. Should you go with a bond mutual fund or with a bond ETF? That's a separate question, and the answer will likely be the same as for stock mutual funds vs stock ETFs, so I'll mostly ignore the question and just say stick with mutual funds unless you are investing at least $50,000 in bonds.

negative: If you are looking to invest for 1-2 years I would suggest you not invest in mutual funds at all. Your time horizon is too short for it to be smart to invest in the stock market.  I'd suggest a high-yield savings account or CD. I know they both have crappy returns, but the stock market can swing wildly with no notice. If you are ready to buy your house and the market is down 50% (it has happened multiple times in history) are you going to have to put off buying your home for an indefinite amount of time waiting to them to recover? If you are absolutely committed to investing in a mutual fund anyway against my advise I'd suggest an indexed fund that contains mostly blue chip stocks (indexed against the DOW).

negative: "I think you are asking about actively managed funds vs. indexes and possibly also vs. diversified funds like target date funds. This is also related to the question of mutual fund vs. ETF. First, a fund can be either actively managed or it can attempt to track an index. An actively managed fund has a fund manager who tries to find the best stocks to invest in within some constraints, like ""this fund invests in large cap US companies"". An index fund tries to match as closely as possible the performance of an index like the S&P 500. A fund may also try to offer a portfolio that is suitable for someone to put their entire account into. For example, a target date fund is a fund that may invest in a mix of stocks, bonds and foreign stock in a proportion that would be appropriate to someone expecting to retire in a certain year. These are not what people tend to think of as the canonical examples of mutual funds, even though they share the same legal structure and investment mechanisms. Secondly, a fund can either be a traditional mutual fund or it can be an exchange traded fund (ETF). To invest in a traditional mutual fund, you send money to the fund, and they give you a number of shares equal to what that money would have bought of the net asset value (NAV) of the fund at the end of trading on the day they receive your deposit, possibly minus a sales charge. To invest in an ETF, you buy shares of the ETF on the stock market like any other stock. Under the covers, an ETF does have something similar to the mechanism of depositing money to get shares, but only big traders can use that, and it's not used for investing, but only for people who are making a market in the stock (if lots of people are buying VTI, Big Dealer Co will get 100,000 shares from Vanguard so that they can sell them on the market the next day). Historically and traditionally, ETFs are associated with an indexing strategy, while if not specifically mentioned, people assume that traditional mutual funds are actively managed. Many ETFs, notably all the Vanguard ETFs, are actually just a different way to hold the same underlying fund. The best way to understand this is to read the prospectus for a mutual fund and an ETF. It's all there in reasonably plain English."

negative: "The ""risk"", other than losing principal (especially when rates go up) is capital gains. As with any mutual fund, this one might need to sell assets for cashflow. In which case the taxes on the sales are shifted to the investors. So you may end up with the fund losing value due to price fluctuations, yet you'll have capital gains (probably with a significant short term part since the maturity periods are relatively short) to pay taxes on. To what extent that may happen depends on the fund's cashflow (influx of money vs. withdrawals). Capital gains reduce your basis (since no money is actually distributed), but if you hold the fund for more than a year - you lose the difference between the short term and the long term tax for the short term portion of the gains."

negative: "I think the real answer to your question here is diversification.  You have some fear of having your money in the market, and rightfully so, having all your money in one stock, or even one type of mutual fund is risky as all get out, and you could lose a lot of your money in such a stock-market based undiversified investment.  However, the same logic works in your rental property.  If you lose your tennant, and are unable to find a new one right away, or if you have some very rare problem that insurance doesn't cover, your property could become very much not a ""break even"" investment very quickly.  In reality, there isn't any single investment you can make that has no risk.  Your assets need to be balanced between many different market-investments, that includes bonds, US stocks, European stocks, cash, etc.  Also investing in mutual funds instead of individual stocks greatly reduces your risk. Another thing to consider is the benefits of paying down debt.  While investments have a risk of not performing, if you pay off a loan with interest payments, you definitely will save the money you would have paid in interest.   To be specific, I'd recommend the following plan -"

negative: As the commenters have already indicated, money market mutual funds are not guaranteed to maintain principal during all market conditions, and investments in mutual funds are not insured against loss due to market changes. That said, you can run a price search on Vanguard's website and see these results: So, despite all the economic problems since 1975, VMMXX has never traded at a price other than $1.00.

negative: Behind the scenes, mutual funds and ETFs are very similar.  Both can vary widely in purpose and policies, which is why understanding the prospectus before investing is so important. Since both mutual funds and ETFs cover a wide range of choices, any discussion of management, assets, or expenses when discussing the differences between the two is inaccurate.  Mutual funds and ETFs can both be either managed or index-based,  high expense or low expense, stock or commodity backed. Method of investing When you invest in a mutual fund, you typically set up an account with the mutual fund company and send your money directly to them.  There is often a minimum initial investment required to open your mutual fund account.  Mutual funds sometimes, but not always, have a load, which is a fee that you pay either when you put money in or take money out. An ETF is a mutual fund that is traded like a stock.  To invest, you need a brokerage account that can buy and sell stocks.  When you invest, you pay a transaction fee, just as you would if you purchase a stock.  There isn't really a minimum investment required as there is with a traditional mutual fund, but you usually need to purchase whole shares of the ETF.  There is inherently no load with ETFs. Tax treatment Mutual funds and ETFs are usually taxed the same.  However, capital gain distributions, which are taxable events that occur while you are holding the investment, are more common with mutual funds than they are with ETFs, due to the way that ETFs are structured.  (See Fidelity: ETF versus mutual funds: Tax efficiency for more details.)  That having been said, in an index fund, capital gain distributions are rare anyway, due to the low turnover of the fund. Conclusion When comparing a mutual fund and ETF with similar objectives and expenses and deciding which to choose, it more often comes down to convenience.  If you already have a brokerage account and you are planning on making a one-time investment, an ETF could be more convenient.  If, on the other hand, you have more than the minimum initial investment required and you also plan on making additional regular monthly investments, a traditional no-load mutual fund account could be more convenient and less expensive.

negative: In my opinion, if you are doing long-term investing, this is a non-issue.  The difference of hours in being able to trade an ETF during the day vs. only being able to trade a traditional mutual fund at day-end is irrelevant if you are holding the investment for a long time. If you are engaging in day trading, market timing, or other advanced/controversial trading practices, then I suppose it could make a difference. For the way I invest (index funds, long-term, set-it-and-forget-it), ETFs have no advantage over traditional mutual funds.

negative: "Often in life we have to choose the lesser of evils.  Whole Life as an investment vs. Term Life and invest the difference is one of these times. I assume the following statement is true. ""The commissions on whole life are sick. The selling agent gets upward of 90% of your first year's premium."" But how does that compare to investing in mutual funds (as one alternative)?   Well according to Vanguard the average mutual fund keeps 60% of the total returns over the average investors lifetime. And of course income taxes (on withdrawal) consume another 30% (or more) of the dollars you withdraw (from a tax deferred retirement plan like a 401k.) http://www.fool.com/School/MutualFunds/Performance/Record.htm So you have to pick your poison and make the choice that fits your view of the future. Personally I don't believe my cost of living in retirement will be radically lower than my cost of living while working. Additionally I believe income tax rates will be higher in the future than the in the present and so deferring taxes (like a 401k) doesn't make sense to me.  (In 1980 a 401k made sense when the average 401k participant was paying over 50% in federal income tax and also got a pension.) So paying 90% of my first year's premium rather than 60% of my gains over my lifetime seems acceptable.  And borrowing tax free against my life insurance once retired (with no intention of paying it back) will, I believe, provide greater income than a 401k could."

negative: Bond ETFs are just another way to buy a bond mutual fund.  An ETF lets you trade mutual fund shares the way you trade stocks, in small share-size increments.  The content of this answer applies equally to both stock and bond funds. If you are intending to buy and hold these securities, your main concerns should be purchase fees and expense ratios.  Different brokerages will charge you different amounts to purchase these securities.  Some brokerages have their own mutual funds for which they charge no trading fees, but they charge trading fees for ETFs.  Brokerage A will let you buy Brokerage A's mutual funds for no trading fee but will charge a fee if you purchase Brokerage B's mutual fund in your Brokerage A account. Some brokerages have multiple classes of the same mutual fund.  For example, Vanguard for many of its mutual funds has an Investor class (minimum $3,000 initial investment), Admiral class (minimum $10,000 initial investment), and an ETF (share price as initial investment).  Investor class has the highest expense ratio (ER).  Admiral class and the ETF generally have much lower ER, usually the same number.  For example, Vanguard's Total Bond Market Index mutual fund has Investor class (symbol VBMFX) with 0.16% ER, Admiral (symbol VBTLX) with 0.06% ER, and ETF (symbol BND) with 0.06% ER (same as Admiral).  See Vanguard ETF/mutual fund comparison page.  Note that you can initially buy Investor class shares with Vanguard and Vanguard will automatically convert them to the lower-ER Admiral class shares when your investment has grown to the Admiral threshold. Choosing your broker and your funds may end up being more important than choosing the form of mutual fund versus ETF.  Some brokers charge very high purchase/redemption fees for mutual funds.  Many brokers have no ETFs that they will trade for free.  Between funds, index funds are passively managed and are just designed to track a certain index; they have lower ERs.  Actively managed funds are run by managers who try to beat the market; they have higher ERs and tend to actually fall below the performance of index funds, a double whammy. See also Vanguard's explanation of mutual funds vs. ETFs at Vanguard. See also Investopedia's explanation of mutual funds vs. ETFs in general.

negative: 1) How does owning a home fit into my financial portfolio? Most seem to agree that at best it is a hedge against rent or dollar inflation, and at worst it should be viewed as a liability, and has no place alongside other real investments. Periods of high inflation are generally accompanied with high(er) interest rates. Any home is a liability, as has been pointed out in other answers; it costs money to live in, it costs money to keep in good shape, and it offers you no return unless you sell it for more than you have paid for it in total (in fact, as long as you have an outstanding mortgage, it actually costs you money to own, even when not considering things like property taxes, utilities etc.). The only way to make a home an investment is to rent it out for more than it costs you in total to own, but then you can't live in it instead. 2) How should one view payments on a home mortgage? How are they similar or different to investing in low-risk low-reward investments? Like JoeTaxpayer said in a comment, paying off your mortgage should be considered the same as putting money into a certificate of deposit with a term and return equivalent to your mortgage interest cost (adjusting for tax effects). What is important to remember about paying off a mortgage, besides the simple and not so unimportant fact that it lowers your financial risk over time, is that over time it improves your cash flow. If interest rates don't change (unlikely), then as long as you keep paying the interest vigilantly but don't pay down the principal (assuming that the bank is happy with such an arrangement), your monthly cost remains the same and will do so in perpetuity. You currently have a cash flow that enables you to pay down the principal on the loan, and are putting some fairly significant amount of money towards that end. Now, suppose that you were to lose your job, which means a significant cut in the household income. If this cut means that you can't afford paying down the mortgage at the same rate as before, you can always call the bank and tell them to stop the extra payments until you get your ducks back in the proverbial row. It's also possible, with a long history of paying on time and a loan significantly smaller than what the house would bring in in a sale, that you could renegotiate the loan with an extended term, which depending on the exact terms may lower your monthly cost further. If the size of the loan is largely the same as or perhaps even exceeds the market value of the house, the bank would be a lot more unlikely to cooperate in such a scenario. It's also a good idea to at the very least aim to be free of debt by the time you retire. Even if one assumes that the pension systems will be the same by then as they are now (some don't, but that's a completely different question), you are likely to see a significant cut in cash flow on retirement day. Any fixed expenses which cannot easily be cut if needed are going to become a lot more of a liability when you are actually at least in part living off your savings rather than contributing to them. The earlier you get the mortgage paid off, the earlier you will have the freedom to put into other forms of savings the money which is now going not just to principal but to interest as well. What is important to consider is that paying off a mortgage is a very illiquid form of savings; on the other hand, money in stocks, bonds, various mutual funds, and savings accounts, tends to be highly liquid. It is always a good idea to have some savings in easily accessible form, some of it in very low-risk investments such as a simple interest-bearing savings account or government bonds (despite their low rate of return) before you start to aggressively pay down loans, because (particularly when you own a home) you never know when something might come up that ends up costing a fair chunk of money.

negative: First of all, congratulations on your home purchase.  The more equity you build in your house, the more of the sale price you get out of it when you move to your next house.  This will enable you to consume more house in the future.  Think of it as making early payments towards your next down payment. Another option is to save up a chunk of money and recast your mortgage, paying down the principal and having the resulting amount re-amortized to provide you with a lower monthly payment.  You may be able to do this at least once during your time in the house, and if you do it early enough it can potentially help your savings in other areas. On the other hand, it is possible given today's low interest rates for mortgages that in other forms of investments (such as index funds) you could make more on the money you'd be putting towards your extra payments.  Then you would have more money in savings when you go to sell this house and buy the next one that you would in equity if you didn't go that route.  This is riskier than building equity in your home, but potentially has a bigger pay-off. You do the trade-offs.

negative: Your idea is a good one, but, as usual, the devil is in the details, and implementation might not be as easy as you think.  The comments on the question have pointed out your Steps 2 and 4 are  not necessarily the best way of doing things, and that perhaps  keeping the principal  amount invested in the same fund instead of taking it all out and re-investing it in a similar, but different, fund might be better. The other points for you to consider are as follows. How do you identify which of the thousands of conventional mutual  funds and ETFs is the average-risk / high-gain mutual fund into which you will place your initial investment?  Broadly speaking, most actively managed mutual fund with average risk are likely to give you  less-than-average gains over long periods of time.  The  unfortunate truth, to which many pay only Lipper service, is that  X% of actively managed mutual funds  in a specific category failed  to beat the average gain of all funds in that category, or the  corresponding index, e.g. S&P 500 Index for large-stock mutual funds, over the past N years, where X is generally between 70 and  100, and N is 5, 10, 15 etc.  Indeed, one of the arguments in  favor of investing in a very low-cost index fund is that you are effectively guaranteed the average gain (or loss :-(, don't forget the possibility of loss). This, of course, is also the argument used against investing in index funds.  Why invest in boring index funds and settle for average gains (at essentially no risk of not getting the average performance: average performance is close to guaranteed) when you can  get much more out of your investments by investing in a fund that is among the (100-X)% funds that had better than average returns?  The difficulty is that which funds are X-rated and which non-X-rated (i.e. rated G = good or PG = pretty good), is known only in hindsight whereas what you need is foresight. As everyone will tell you, past performance does not guarantee future results.  As someone (John Bogle?) said,  when you invest in a mutual fund, you are in the position of a rower in rowboat: you can see where you have been but not where you are going.  In summary, implementation of your strategy needs a good crystal ball to look into the future. There is no such things as a guaranteed bond fund. They also have risks though not necessarily the same as in a stock mutual fund. You need to have a Plan B in mind in case your chosen mutual fund takes a longer time than expected to return the 10% gain that you want to use to trigger profit-taking and investment of the gain into a low-risk bond fund, and also maybe a Plan C in case the vagaries of the market cause your chosen mutual fund to have negative return for some time. What is the exit strategy?

negative: If your house was paid off, would you be comfortable borrowing from the equity to invest? This is essentially the same question.  Also, why not ask the opposite? How much more should you be borrowing (at a similar rate) for investments? Your answer to both questions will be clues to how you view the risk/reward of borrowing against your house in order to invest. My personal preference is not to invest with borrowed money. There may be a few percent of potential returns I am missing out on. That percent return has to be analyzed in the context of a full financial plan and future goals.

negative: Both are incorrect. What it says is if your fund value is 25,000 in first year; then this will earn 19.4% compound for 5 years. This is same as 142.5 absolute. The money invested in second year, will only earn for 4 years, compound interest of 19.4%. so on ... The 25000 invested last year only 19.4 for a year. The other aspect you are missing is when you pay 25,000; 4% goes towards charges. So you are only investing 24,000. Plus there is an amount towards life cover. Depending on age, around 1000 for one lacs. This means the investment is only 23000 or 23500. Generally it is not advised to buy ULIP. It is cheaper to buy term insurance plus mutual fund.

negative: First, you need to understand the difference in discussing types of investments and types of accounts. Certificate of Deposits (CDs), money market accounts, mutual funds, and stocks are all examples of types of investments. 401(k), IRA, Roth IRA, and taxable accounts are all examples of types of accounts. In general, those are separate decisions to make.  You can invest in any type of investment inside any type of account.  So your question really has two different parts:   Tax-advantaged retirement accounts vs. Standard taxable accounts FDIC-insured CDs vs. at-risk investments (such as stock mutual funds) Retirement accounts are special accounts allowed by the federal government that allow you to delay (or, in some cases, completely avoid) paying taxes on your investment.  The trade-off for these accounts is that, in general, you cannot access any of the money that you put into these accounts until you get to retirement age without paying a steep penalty.  These accounts exist to encourage citizens to save for their own retirement.  Examples of retirement accounts include 401(k) and IRAs. Standard taxable accounts have no tax advantages, but no restrictions, either.  You can put money in and take money out whenever you like.  However, anything that your investment earns is taxable each year. Inside any of these accounts, you can invest in FDIC-insured bank accounts, such as savings accounts or CDs, or you can invest in any number of non-insured investments, including money market accounts, bonds, mutual funds, stocks, precious metals, etc. Something you need to understand about investing in general is that your potential returns are directly related to the amount of risk that you take on.  Investing in an insured investment, which is guaranteed by the government to never lose its value, will result in the lowest potential investment returns that you can get. Interest-bearing savings accounts are currently paying less than 1% interest.  A CD will get you a slightly higher interest rate in exchange for you agreeing not to withdraw your money for a period of time. However, it takes a long time for your investments to grow with these investments.  If you are earning 1%, it takes 72 years for your investment to double. If you are willing to take some risk, you can earn much more with your investments.  Bonds are often considered quite safe; with a bond, you loan money to a government or corporation, and they pay you back with interest.  The risk comes from the possibility that the government or corporation won't pay you back, so it is important to choose a bond from an entity that you trust. Stocks are shares in for-profit companies.  Your potential investment gain is unlimited, but it is risky, as stocks can go down in value, and companies can close.  However, it is important to note that if you take the largest 500 stocks together (S&P 500), the average value has consistently gone up over the long term.  In the last 35 years, this average value has gone up about 11%.  At this rate, your investment would double in less than 7 years. To avoid the risk of picking a losing stock, you can invest in a mutual fund, which is a collection of stocks, bonds, or other investments.  The idea is that you can, with one investment, invest in many stocks, essentially earning the average performance of all the stocks.  There is still risk, as the market can be down as a whole, but you are insulated from any one stock being bad because you are diversified. If you are investing for something in the long-term future, such as retirement, stock mutual funds provide a good rate of return at an acceptably-low level of risk, in my opinion.

negative: Both are close, but two notes - amiable or not, I'd rather have a deal that ends now, and nothing is hanging over my head to get or pay money on a future sale.  401(k) money is usually pre-tax, so releasing me from $10K of home equity is of more value than the $10K in a 401(k) that would net me $7K or so.  As I commented to Joe, I'd focus on valuation. If your house is similar to those in the neighborhood, you might easily value it. If unique, the valuation may be tough. I'd spend a bit on an appraiser or two.

negative: Normally, you don't pay capital gains tax until you actually realize a capital gain.  However, there are some exceptions. The exception that affected Eduardo Saverin is the expatriation tax, or exit tax.  If you leave a country and are no longer a tax resident, your former country taxes you on your unrealized capital gains from the period that you were a tax resident of that country.  There are several countries that have an expatriation tax, including the United States.  Saverin left the U.S. before the Facebook IPO. Saverin was perhaps already planning on leaving the U.S. (he is originally from Brazil and has investments in Asia), so leaving before the IPO limited the amount of capital gains tax he had to pay upon his exit.  (Source: Wall Street Journal: So How Much Did He Really Save?) Another situation that might be considered an exception and affects a lot of us is capital gain distributions inside a mutual fund.  When mutual fund managers sell investments inside the fund and realize gains, they have to distribute those gains among all the mutual fund investors.  This often takes the form of additional shares of the mutual fund that you are given, and you have to pay capital gains tax on these distributions.  As a result, you can invest in a mutual fund, leave your money there and not sell, but have to pay capital gains tax anyway.  In fact, you could owe capital gains tax on the distributions even if the value of your mutual fund investment has gone down.

negative: The net return reported to you (as a percentage) by a mutual fund is the gross return minus the expense ratio.  So, if the gross return is X% and the expense ratio is Y%, your account will show a return of (X-Y)%.  Be aware that X could be negative too. So, with Y = 1, If X = 10 (as you might get from a stock fund if you believe historical averages will continue), then the net return is 9% and you have lost (Y/X) times 100% = 10% of the gross return. If X = 8 (as you might get from a bond fund if you believe historical averages will continue), then the net return is 7% and you have lost (Y/X) times 100% = 12.5% of the gross return. and so on and so forth.  The numbers used are merely examples of the returns that have been obtained historically, though it is worth emphasizing that 10% is an average return, averaged over many decades, from investments in stocks, and to believe that one will get a 10% return year after year is to mislead oneself very badly. I think the point of the illustrations is that expense ratios are important, and should matter a lot to you, but that their impact is proportionately somewhat less if the gross return  is high, but very significant if the gross return is low, as  in money-market funds.  In fact, some money market funds which  found that X < Y have even foregone charging the expense ratio  fee so as to maintain a fixed $1 per share price.  Personally,  I would need a lot of persuading to invest in even a stock fund with 1% expense ratio.

negative: First off, I do not recommend buying individual bonds yourself. Instead buy a bond fund (ETF or mutual fund). That way you get some diversification.  The risk-reward ratio will be evident in what you find to invest in. Junk bond funds pay the highest rates. Treasury bond funds pay the lowest. So you have to ask yourself how comfortable are you with risk?  Buy the funds that pay the highest rate but still let you sleep at night.

negative: Not sure of your locality. In the USA, there are many options. There are many corporate bonds that pay interest monthly. You can invest in a handful of bonds, chosen so at least one of them pays interest each month. (Minimum investment requirements make this an expensive option)  Unit Trusts made of bonds (a handful of bonds wrapped into a single fixed investment) usually pay monthly interest. As the bonds begin to mature, the interest payments shrink (but you begin to get principal payments which can be reinvested). Bond mutual funds and ETFs usually provide monthly dividends (that come from the interest and capital gains of the bonds held by the fund). Dividends are usually consistent, but not necessarily fixed.  You can produce a monthly income from stocks in the same way as the above mentioned bond methods. Income can be consistent, but not fixed.

negative: Emergency funds, car funds etc tend to have to be accessible quickly (which tends to rule out CDs unless you have the patience to work something like a monthly CD ladder, an I don't) and you'll want your principal protected. The latter pretty much rules out any proper investment (ETFs, mutual funds, stock market directly, Elbonian dirt futures etc). It's basically a risk-vs-return calculation. Not much risk, not much return but at least you're not losing from a nominal standpoint). Another consideration is that you normally aren't able to decide freely if and when you want to pull money out of an emergency fund. If it is an emergency, waiting three weeks to see if the stock market goes up a little further isn't an option so you might end up having to take a hit that would be irrelevant if you were investing long term but might hurt badly because you're left with no choice. I'd stick that sort of money into a money market account and either add to it if necessary to keep up with inflation or make sure that my non-retirement investments over and above these funds are performing well, as those will and should become a far bigger part of your wealth in the longer run.