Author Topic: So tempted to just pay off home first.  (Read 2061 times)

JenniferW

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So tempted to just pay off home first.
« on: October 09, 2018, 12:42:29 AM »
It would be a guaranteed 4.65% return.  P/E ratios are getting pretty high.  I was thinking I might ride the stock market for 1 more year then sell off and switch to paying off home. I don't know. Gah!  I don't have but a couple thousand in stocks at the moment.. just starting out with my retirement plan.

I can save about $1800 per month.. have been for a few months now.

I owe $54k on home.

[Just read Mr. Money Mustache's recent blog entry where he gave link to this wonderful chart.. I've been looking for something like this!]

« Last Edit: October 09, 2018, 12:45:58 AM by JenniferW »

One

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Re: So tempted to just pay off home first.
« Reply #1 on: October 09, 2018, 01:22:56 AM »
It would be a guaranteed 4.65% return.  P/E ratios are getting pretty high.  I was thinking I might ride the stock market for 1 more year then sell off and switch to paying off home. I don't know. Gah!  I don't have but a couple thousand in stocks at the moment.. just starting out with my retirement plan.

I can save about $1800 per month.. have been for a few months now.

I owe $54k on home.

[Just read Mr. Money Mustache's recent blog entry where he gave link to this wonderful chart.. I've been looking for something like this!]



I like your plan!  You could also do both, put some in the stock market and put some towards the loan.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #2 on: October 09, 2018, 01:49:27 AM »
I like your plan!  You could also do both, put some in the stock market and put some towards the loan.

Maybe 1/3rd into Ally (1.9%) for Emergency Fund (I still need to build it up), 1/3rd into stocks and 1/3rd into home?

One

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Re: So tempted to just pay off home first.
« Reply #3 on: October 09, 2018, 02:09:34 AM »
I like your plan!  You could also do both, put some in the stock market and put some towards the loan.

Maybe 1/3rd into Ally (1.9%) for Emergency Fund (I still need to build it up), 1/3rd into stocks and 1/3rd into home?

That sounds great, and because you mentioned Shiller, here's a recent comment he made about the stock market.
https://www.cnbc.com/2018/10/01/bull-run-has-echoes-of-1920s-nobel-prize-winning-economist-shiller.html

MustacheAndaHalf

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Re: So tempted to just pay off home first.
« Reply #4 on: October 09, 2018, 03:36:14 AM »
If you have a 4.65% mortgage, in general that's tax deductible - which lowers the money you save by paying it off.  For example, in the 22% tax bracket, after the tax deduction you're looking at a 3.63% return.

It's very popular to use dogmatic definitions of corrections and call this the longest bull run - by ignoring a -18% drop because it was under -20%.  Another arbitrary aspect is measuring from the depths of the 2008-2009 crisis, which was naturally deeper than anything seen in recent history.  The "start" of a bull market is measured the same after a -20% drop and a -50% drop, even though naturally the recovery from a -50% takes longer.

So by ignoring the depth of the 2008 crisis, and ignoring any drops of less than -20%, most of the media is happily calling this the longest bull market.  But it's much shorter if you measure from the recovery, or if you measure from the last -15% or greater drop.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #5 on: October 09, 2018, 03:39:47 AM »
If you have a 4.65% mortgage, in general that's tax deductible - which lowers the money you save by paying it off.  For example, in the 22% tax bracket, after the tax deduction you're looking at a 3.63% return.

I pay $0 in state and federal taxes.  My self employment income is only about $8000 per year.  Since my earned income is so low, I actually get an earned income credit and only pay about 1/2 of the self employment taxes.. about $600 total on that $8000.   

The majority of income is from Social Security Disability Insurance (27k), which I don't pay any taxes on at all.

Also, my standard deduction is much higher than it would be if I itemized since my mortgage payment is only $557.35 per month on $76k home.  I don't have large medical bills either.
« Last Edit: October 09, 2018, 03:48:19 AM by JenniferW »

talltexan

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Re: So tempted to just pay off home first.
« Reply #6 on: October 09, 2018, 07:39:38 AM »
Jennifer-
I cannot tell how old you are or how much retirement savings you have at risk in the market.

It sounds as though you have approximately $3,000 per month of income, and your mortgage payment is less than 20% of that. Are there factors that might affect that payment in the near-term (is it an adjustable rate? do you plan to not be in the property much longer?)

theoverlook

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Re: So tempted to just pay off home first.
« Reply #7 on: October 09, 2018, 07:48:30 AM »
Even if it crashes, you're better off in the market. You've got income to support the mortgage payment, you've got a good rate, and presumably you're in this for the long haul. Don't worry about the pe. Worry about calming your market timing impulses. I assume you've seen this, but it's worth another read:

https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

Paying off your house relieves you of a recurring monthly payment but it doesn't really build wealth that you can retire on. Unless you're planning to be homeless in retirement, you'll need both the house and a stream of passive income. Keep investing now - money put in now will work out better for you than money put in later. Simple math says that.

Keep in mind, even if the market goes down, you'll get dividends. VTSAX (Vanguard total market index) earns about 2% dividends. So by paying off your house, you're at the most saving 2.65%, assuming stocks never go up from here. But in reality you're probably costing yourself about 5%.

reeshau

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Re: So tempted to just pay off home first.
« Reply #8 on: October 09, 2018, 08:05:59 AM »
There are many ways to optimize your life.  What are you optimizing?

1.  Your net worth, which leads to your standard of living
2.  Your happiness, which is positively impacted by sleeping well at night, aka not worrying about your assets

I think the way you posed the question sort of elicited the "cry for help" responses.  But in the end, if you can live with the foregone opportunity of continued stock market participation, and you can reach your own personal savings / career / retirement / life goals, there is nothing wrong with paying it off.  It sounds like this is a question #2 issue in your mind.  There is no dumb choice among the posted options.  It's not like you posted "just have to buy a Ferrari now."

smallstache

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Re: So tempted to just pay off home first.
« Reply #9 on: October 09, 2018, 08:07:25 AM »
If you have a 4.65% mortgage, in general that's tax deductible - which lowers the money you save by paying it off.  For example, in the 22% tax bracket, after the tax deduction you're looking at a 3.63% return.

Under the previous tax regime, I would agree with this statement.  With the new standard deduction and the historically low mortgage interest rates, you would need a very large mortgage balance and lots of other itemized deductions before taxes factor into the equation.  Unless you own a McMansion in a high-tax state, you are probably taking the standard deduction.

It will be interesting going forward if the math favors paying off the house over investing.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #10 on: October 09, 2018, 08:15:27 AM »
Jennifer-
I cannot tell how old you are or how much retirement savings you have at risk in the market.

It sounds as though you have approximately $3,000 per month of income, and your mortgage payment is less than 20% of that. Are there factors that might affect that payment in the near-term (is it an adjustable rate? do you plan to not be in the property much longer?)

1) I'm 47
2) I currently only have $2600 in the stock market -- only in investment accounts, no retirement account yet.
3) My monthly income is about $2950 per month -- 0% tax bracket and earned income credit of $500.
4) My mortgage payment is $557 which is 19% of monthly income -- fixed rate at 4.65%
5) Home is worth $78k and I owe $54k on it.
6) I can save $1800 per month after the frugal hacks -- about 61% savings rate.
7) We plan on living in this property the rest of our lives -- we're happy here.

Ideally I'd save like $5-10k in emergency fund, but I am finding I am using Robinhood as my emergency fund because I can resist buying some stock bargains right now -- currently invested in AAPL, FB and KSS.  [I just bought another share of FB this morning.]   I have about $1500 cash in the banks.

I am going to max out my Roth IRA by April at $5500.  Will put into VTI probably.

EDIT: I have no credit card debt or other loans besides my mortgage.
« Last Edit: October 09, 2018, 08:22:35 AM by JenniferW »

neo von retorch

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Re: So tempted to just pay off home first.
« Reply #11 on: October 09, 2018, 08:59:57 AM »
You have to subtract the standard deduction when you try to figure out how much itemized deductions help you. I believe it's now $12k for a single person (and $24k for married filing jointly.) So you need state taxes and mortgage interest exceeding those amounts to BEGIN to get a benefit. 4.65% is a high enough mortgage that I would not judge someone harshly for paying it off in place of investments. Just a little harshly ;)

1. This is attempting to time the market
2. Over a long enough timeline, the market being "at the top" ;) according to Shiller ratio isn't a huge indicator of overall performance

I'm not awake enough to do the math of how long you'd hold the mortgage and have your money invested if you made the minimum mortgage payment, but that would help to determine if it's a good idea.

Scortius

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Re: So tempted to just pay off home first.
« Reply #12 on: October 09, 2018, 10:20:53 AM »
4.65% is getting up there in terms of mortgage rates. And, as Neo mentioned, it's highly unlikely people will be able to take advantage of the Mortgage Interest Deduction anymore. That said, the most important question left is whether or not you have tax-advantaged space you're not using, such as your $5,500 IRA cap. Given that you said your total investments are so low, it looks like you probably do have that room. You mentioned maxing your Roth. I think that's a nice baseline priority each year, though if you remain in the 0% bracket for the rest of your life it probably doesn't matter that much. After that I would say that the trade-off is pretty minor, and if you have such a stable lifestyle that doesn't require the gains then you're probably fine either way. Generally I'm strongly in favor of keeping the mortgage, but this case I think is a little different than most.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #13 on: October 09, 2018, 10:44:17 AM »
4.65% is getting up there in terms of mortgage rates. And, as Neo mentioned, it's highly unlikely people will be able to take advantage of the Mortgage Interest Deduction anymore. That said, the most important question left is whether or not you have tax-advantaged space you're not using, such as your $5,500 IRA cap. Given that you said your total investments are so low, it looks like you probably do have that room. You mentioned maxing your Roth. I think that's a nice baseline priority each year, though if you remain in the 0% bracket for the rest of your life it probably doesn't matter that much. After that I would say that the trade-off is pretty minor, and if you have such a stable lifestyle that doesn't require the gains then you're probably fine either way. Generally I'm strongly in favor of keeping the mortgage, but this case I think is a little different than most.

Looks like I could also setup a Solo Roth 401k, put 92.93% of my self-employed $8k net profit into it, then use that same earned income for the $5500k in Roth IRA.  So I could put close to $13k into retirement based on 8k earned income.  Seems like a clever loophole. I talked to two CPA's over the phone and they think it would work, but I want to talk to a tax attorney.  [The extra money for the Roth IRA would essentially then be coming from my SSDI income, which is unearned.]
« Last Edit: October 09, 2018, 10:47:05 AM by JenniferW »

rbuck

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Re: So tempted to just pay off home first.
« Reply #14 on: October 09, 2018, 12:25:46 PM »
I don't think paying off the mortgage is a good idea at all given your circumstances. If I am reading this right you are 47 and only have $2,600 in investments and no retirement accounts. Do you have a large amount of money sitting in a savings account. In order for passive investing to work properly you need a long time horizon. If you shift to paying off the home it looks to push you to being over 50 before you begin investing again, and right now you only have $2,600 in the markets. At that rate you will never see enough growth to leave off of in retirement.

I say ride the mortgage out. When there is a market correct just thing of it as a fire sale and enjoy the capital gains when the market comes back.

Askel

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Re: So tempted to just pay off home first.
« Reply #15 on: October 09, 2018, 01:08:04 PM »
Ah! Finally someone with mortgage numbers similar to mine! 

With a small mortgage balance like ours, the argument for riding it out to play in the stock market becomes increasingly small.

Carefully consider whether you're maxing out all your tax free investment options before throwing money at the mortgage.

If so, remember that a 99% paid off mortgage still isn't paid off. Bad luck happens and you can still lose the house even though you may not owe a ton of money on it. 

Although, once I got within a year of being able to pay mine off and felt stable enough in my employment with a decent amount of savings to ward off any bad luck, I decided to go for it. 

Personally, I agree that this maybe isn't the best time to dump money in the market. I'm willing to risk slacking off on investing for a year to pay off the house. 

$3999.99 left to go for me. I'll be burning the mortgage this thanksgiving.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #16 on: October 09, 2018, 02:24:39 PM »
$3999.99 left to go for me. I'll be burning the mortgage this thanksgiving.

Congratulations!  That's fricking awesome!  So happy for you!  Then you'll be 100% debt free right?  Love it love it.

Financial.Velociraptor

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Re: So tempted to just pay off home first.
« Reply #17 on: October 09, 2018, 02:28:59 PM »
I am one of the official heretics around these parts.  I paid my mortgage off before putting anything in the market, save what I could get a 401k match on.  I'm also a stock picker and active investor.  Paying off the mortgage was part of the  plan for psychological reasons.  I wanted to pursue what I knew would be a high volatility strategy and I couldn't justify it to myself if I was betting the mortgage money.

I have since hit my target number and dialed back the risk significantly.

On a strictly logical, numbers basis: it doesn't make much financial sense to pay off a low rate mortgage early (mine was 6.00%).  I did what I did for emotional and psychological reasons and understood that going in. 

I can be reached by PM if you want to discuss any aspect out of the public eye.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #18 on: October 09, 2018, 02:30:37 PM »
Another reason I wanted to pay off the home soon is so I can leave to my boyfriend if I died for some reason within the next few years.   I am worried if I owed on it, the bank wouldn't let him take over the loan, despite having several thousands in stock market & retirement accounts which he'd inherit as well.   Estate law is really confusing to me.  If something can go wrong, with my luck it will.

rpr

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Re: So tempted to just pay off home first.
« Reply #19 on: October 09, 2018, 02:48:25 PM »
Personally, I'd do the following:

1. Contribute the max to a Roth -- $5500 this year and should be $6000 in 2019
2. Save the rest in a taxable account. (~$15000)

For both I'd put it in a moderate asset allocation portfolio, like 60/40 or 40/60 stocks/bonds. When the balance in this account reaches your mortgage balance evaluate then. If you feel like it, you can payoff in one fell swoop or distribute it over a couple of years. It will be somewhat tax inefficient but better to go this route. 


effigy98

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Re: So tempted to just pay off home first.
« Reply #21 on: October 09, 2018, 03:10:51 PM »
If you have a 4.65% mortgage, in general that's tax deductible

No it's not... I have multiple businesses, several write offs, and I still cannot get past the standard tax deduction of 24k for us. I guess if I financed my 2m worth of property, sure, but I would never feel comfortable being leveraged that much.

How are you getting past the standard deduction?
« Last Edit: October 09, 2018, 03:20:14 PM by effigy98 »

effigy98

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Re: So tempted to just pay off home first.
« Reply #22 on: October 09, 2018, 03:13:47 PM »
Even MMM is not against paying off the mortgage.

"With the stock market at higher price-to-earnings ratio than usual, there is less harm in paying off your mortgage earlier, keeping six months of living expenses in cash or money market funds, and other non-stock investments like rental properties in low-cost cities (where reliable rent is over 1% of total property price per month)."

http://www.mrmoneymustache.com/2017/06/20/next-recession/

Askel

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Re: So tempted to just pay off home first.
« Reply #23 on: October 09, 2018, 03:45:35 PM »
$3999.99 left to go for me. I'll be burning the mortgage this thanksgiving.

Congratulations!  That's fricking awesome!  So happy for you!  Then you'll be 100% debt free right?  Love it love it.

Not quite, my new bride came with some student loans attached. We're prioritizing the mortgage as:
1. The interest rate is slightly higher.
2. We're looking at moving soon (my charming 2 room bachelor cabin ain't cuttin' it for married life). Having it paid off gives us a lot more freedom and less stress during this process. 
3. If everything goes to hell for some reason, nobody will foreclose on her degree.

rpr

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Re: So tempted to just pay off home first.
« Reply #24 on: October 09, 2018, 03:53:15 PM »
The OP has practically no liquidity at all -- $2600 in stocks + $1500 in the bank. Most of the OP's net worth is tied in home equity $24K. It would be beneficial to build up a much larger liquid cushion with a conservative asset allocation with the excess funds. 

The fact that the OP has some stock picking tendencies is a little disconcerting.  So a Roth IRA maybe a good place to start. To get into the habit, invest on a regular basis (monthly). Since we have three months left, the OP could just put all of the available funds ($1800/month) and fully fund the Roth IRA by the end of the year.

RWD

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Re: So tempted to just pay off home first.
« Reply #25 on: October 09, 2018, 04:18:51 PM »
Not quite, my new bride came with some student loans attached. We're prioritizing the mortgage as:
1. The interest rate is slightly higher.
2. We're looking at moving soon (my charming 2 room bachelor cabin ain't cuttin' it for married life). Having it paid off gives us a lot more freedom and less stress during this process. 
3. If everything goes to hell for some reason, nobody will foreclose on her degree.

If everything goes to hell you can't discharge student loans in bankruptcy. Also, you still lose the house if you can't pay the taxes on it.

In your shoes I'd still prioritize the mortgage because of the higher interest rate and the possibility of moving soon. I'm assuming you already have a good emergency fund and are investing heavily in tax-advantaged accounts.

v8rx7guy

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Re: So tempted to just pay off home first.
« Reply #26 on: October 09, 2018, 04:20:53 PM »
Ok, now I know if for sure... boarder42 is trolling us.

Askel

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Re: So tempted to just pay off home first.
« Reply #27 on: October 09, 2018, 04:39:06 PM »

If everything goes to hell you can't discharge student loans in bankruptcy. Also, you still lose the house if you can't pay the taxes on it.

In your shoes I'd still prioritize the mortgage because of the higher interest rate and the possibility of moving soon. I'm assuming you already have a good emergency fund and are investing heavily in tax-advantaged accounts.

My yearly property tax bill is $800. Things will have to get pretty bad before I can't cover that.  ;) 

And true, student loans can't be discharged, but in a worst case scenario there are options like deferment and public service loan forgiveness that don't result in us losing our home. Although we should have them knocked out in another 6 months anyway....

Still keeping up with the 401K. I'm slacking on the Roth, but it's a choice I'm willing to make.

Radagast

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Re: So tempted to just pay off home first.
« Reply #28 on: October 09, 2018, 08:37:10 PM »
No, I do not think you should not put money at the mortgage until you have more than enough to pay it off entirely. The reason is that mortgages are risky and unreliable. Let's look at a hypothetical homebuyer, who we'll name "One" for simplicity. One buys a house in April 2005 with a 30 year 6% mortgage, has a 12-month emergency fund, and contributes all other money towards extra payments on the mortgage. There is a big market crash, and by March 2009 One feels great. Paying toward the mortgage beat the heck out of the markets! Then in April 2009 One becomes unemployed and there is no work to see. One stretches the 12-month E-fund to 15 months by a great display of thrift, but is unable to find employment until July, 2011, which was exactly too late because the bank had sold One's house for a few cents in April 2011, taking all One's extra payments with it, and giving One a 100% loss on every mortgage payment. If only One had invested all that money in a 45% US stock, 30% international stock, 25% government bonds portfolio and rebalanced, instead of partially paying the mortgage!

Apocryphal? Maybe. I know lots of people who lost houses in 2008-2012. I never asked if they had made extra payments in the years before, but I would not be surprised if some had. If they did those extra payments sure worked out really well... for the bank.

I'm thinking maybe use a balanced stock/bond allocation. When your bond allocation grows large enough to pay the mortgage entirely, sure drop it in and own your house outright if it makes you feel better.

Another reason I wanted to pay off the home soon is so I can leave to my boyfriend if I died for some reason within the next few years.   I am worried if I owed on it, the bank wouldn't let him take over the loan, despite having several thousands in stock market & retirement accounts which he'd inherit as well.   Estate law is really confusing to me.  If something can go wrong, with my luck it will.
I don't see the use in making early payments for this. The bankers own 100% of your house until you pay off the mortgage entirely. It makes more sense to pile up easily transferable mutual funds until you can purchase the title to the house, to avoid that situation. (I have no comment on legal aspects because I know nothing of that field.)

Here is what a $557 stream of monthly contributions looked like in the four years leading to (end of) March 2009 in the allocation I described above. Sure it shows a loss, but most of it was still there and set the end year to March 2010 and it was a 4.62% annualized gain. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=2005&firstMonth=4&endYear=2009&lastMonth=3&endDate=10%2F09%2F2018&initialAmount=500&annualOperation=1&annualAdjustment=557&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VGTSX&allocation1_1=45&symbol2=VTSMX&allocation2_1=30&symbol3=VFITX&allocation3_1=25

RWD

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Re: So tempted to just pay off home first.
« Reply #29 on: October 09, 2018, 08:45:16 PM »
Let's look at a hypothetical homebuyer, who we'll name "One" for simplicity.
I like you.

One

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Re: So tempted to just pay off home first.
« Reply #30 on: October 09, 2018, 09:55:16 PM »
Another advantage to having the house paid off is when the market crashes you can dump money into the stock market at the lows while they're selling to pay the mortgage.

RWD

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Re: So tempted to just pay off home first.
« Reply #31 on: October 09, 2018, 10:07:04 PM »
Another advantage to having the house paid off is when the market crashes you can dump money into the stock market at the lows while they're selling to pay the mortgage.
Yeah, that doesn't sound like market timing at all to me... And of course that only applies if you've actually completely paid off your mortgage. If you're right that the market is going to tank soon but don't have enough to completely pay off your mortgage you're better off putting it all in cash instead. But of course if someone suggested sidelining a near-mortgage-sized amount of dollars in a savings account while waiting for a crash we would all ridicule them for market timing.

Maenad

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Re: So tempted to just pay off home first.
« Reply #32 on: October 10, 2018, 11:24:29 AM »
My advice (as usual) is to follow the investment order post and invest according to your investment policy statement.

+1 on this.

DH and I put extra into both our mortgages, and the only reason we paid off the most recent one entirely was because it was really small and just... an annoying additional bill to deal with.

If I could go back in time I wouldn't have. I'm not beating myself up for my sub-optimal decision, because that's all it was. It's not wrong as in "the sky is pink" is wrong, it's just not optimal.

Get a good strong emergency fund, and then invest in accordance with your risk tolerance, which I'm guessing is a lot lower than your stock choices would indicate. The Vanguard Investor Questionnaire: https://personal.vanguard.com/us/FundsInvQuestionnaire is really good at helping with that.

effigy98

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Re: So tempted to just pay off home first.
« Reply #33 on: October 10, 2018, 02:25:59 PM »
One thing paying down the mortgage gives you is protection from yourself. You basically cannot touch that money without massive pain. If you are one to be emotional when you have money "burning a hole in your pocket" or react strongly when the media says the world is coming to and end sell everything, paying the mortgage early protects you from yourself.

JenniferW

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Re: So tempted to just pay off home first.
« Reply #34 on: October 10, 2018, 02:31:48 PM »
Yeah, fortunately when I see the prices go down, especially since I am just starting out, I get excited and can't wait to buy more :)

Stock market had a rough day today.. AAPL & FB down like 5% each, but fortunately my primary holding KSS is actually up 1.11% today :)

I just wish I had more money to buy some more FB stock right now.. such a bargain!