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The Motley Fool

Ask the Fool

Mind the GAAP

Q: What’s “GAAP”? — A.M., Santa Maria, California

A: Investors are likely to see references to GAAP — an acronym for Generally Accepted Accounting Principles — when reviewing companies’ financial statements, such as balance sheets and income statements, or when reading companies’ earnings reports.

As you might imagine, there would be a terrible apples-and-oranges problem if every company could report its earnings and its financial health using any rules it wanted. That’s why the Securities & Exchange Commission (SEC) requires publicly traded U.S. companies to adhere to GAAP rules and standards. For example, GAAP requires companies to accurately recognize and account for all of their assets, liabilities, revenues and expenses. When companies follow GAAP, investors and others can more easily compare results among them.

Private companies, including most small businesses, typically don’t have to follow GAAP. And many publicly traded companies, both big and small, report results on both a GAAP and non-GAAP basis.

Fool’s School

Early Mortgage

Payments?

It’s tempting to want to pay off your mortgage early, and there are reasonable reasons to do so. For example, if retirement is looming, it can be good to enter it without mortgage payments hanging over your head. But there are also good reasons to not pay off that home loan early.

For starters, you’d have less access to ready cash, should you need it. If you pay off your mortgage by wiping out some of your bank accounts and selling stocks in your brokerage account, yes, you’ll be free of the loan. But you’ll also have transferred a lot of asset value into your home — which is not that easy to retrieve money from, if and when you need it. Should you need to buy a new car or pay college tuition, you can’t just sell a fraction of your house. You’d have to either sell the house or take out a second mortgage or home equity loan, and that can take months.

Next, putting much of your available cash into your home means you can’t use the money for other long-term goals, such as investing in retirement accounts. Think of it this way: If your mortgage interest is 4%, every dollar you use to pay off that loan is like earning a guaranteed 4% return because you won’t have to pay 4% on it. Meanwhile, the stock market has averaged annual returns of close to 10% over long periods. Even if your stock investments were to appreciate by 6% or 8% per year, on average, you’d be likely to come out ahead. Of course, much depends on your mortgage interest rate and investment expectations.

Finally, you may lose a valuable tax break. People who itemize deductions on their tax returns are allowed to deduct the mortgage interest they pay — and that can be a hefty sum. Once your mortgage is paid off, there will be no more interest payments to deduct, which can leave you with bigger tax bills.

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