Is my mentality wrong?

[Krishna]

Can someone please tell me if my mentality is wrong?

I try my best not to borrow money. If I want to purchase something large (expensive), I try to take a few months to save up for it. I also try to have emergency funds for emergencies so when something bad happens I have this money cushion.

However, everyone I work with speak about leasing cars, and investing the money. Same with buying houses, they pay the lowest down-payment possible saying they are investing the rest. A few people are able to buy car in the matter of hours. I generally think about a month in advance before buying a car, by speaking with several dealers to see who is giving the lowest price.

They also say a bunch of math that I am not understanding.

Am I doing something wrong? I feel like everyone else is doing something completely different.

Here is my financial information:

Age: 42, Wife: 39 (no children)

Retirement (401(k) + IRA + Roth IRA): 479K (~300K in Roth and 179K in Others)
Non-retirement investments: 650K (Index mutual funds)
Cash: 46K
Home worth: 495K (as per redfin) and I have approximately 49K in mortgage left.
Salary: 175K per year. My wife doesn't work. No other income.

Feel free to be blunt with me.

[englishteacheralex]

Different people are comfortable with different amounts of debt. Debt can be thought of in many different ways, some of which are highly context-specific.

There is a school of thought that asserts that there is no such thing as good debt. That is a mindset that is very risk-averse, and that is fine as long as you understand the trade-offs. For a depreciating asset such as a car, in my opinion, debt constitutes an unacceptable level of risk. Therefore for cars, just like you, I save up money to pay cash for a car that I consider reasonable within my budget, and I avoid replacing my cars, choosing instead to keep them for many years.

The trade off is that you then become cash-poor, because you pay all your cash for the asset. To my mind, that is a good thing in the case of a depreciating asset such as a car, because it encourages you to buy something well within your means so as to avoid going too far into your cash reserves.

For some, the trade-off isn't worth it, and they would prefer to have the cash free in order to do other things with it, preferring to borrow the money for the car. Financially, this only works if the free cash is then invested in something with a higher return than the interest on the car loan would be. That kind of discipline--to invest the free money rather than spend it--is fairly rare, I think.

With mortgages the risk/benefit calculation becomes more complex and often more strongly weighted towards borrowing, because houses in general appreciate, and because mortgage interest rates were so low (up until 2021).  The trade-off of paying down one's mortgage as quickly as possible is that you have quite a bit of money tied up in an illiquid asset, when the cost of borrowing that money (used to be) quite low.

For example, my mortgage has a 2.99% interest rate. I can get 5% return just in a money market account or a treasury bond right now--two extremely stable investments--so it doesn't make mathematical sense to pay down the lower interest rate. Since we are fairly disciplined people with no other debt, we choose to pay down our mortgage as slowly as possible, knowing that we have indeed invested quite a bit of our extra money--the money that we could be using to pay our mortgage more aggressively--in various types of accounts, rather than spending it on discretionary items.

These are choices that everyone gets to make for themselves, depending on their comfort level with risk, their discipline surrounding money, and their goals. I think the essential thing is to understand the trade-offs and also be honest with oneself about one's financial habits.

[Krishna]

Thank you @englishteacheralex!

In terms of financial health, am I doing OK? It looks like a lot of money for me, but I am not sure if this is enough when I am thinking about retiring around 63-65 years old.

[Freedomin5]

Your thinking and everything you’re doing is normal for the folks on this forum. Everything everyone else around you is doing is what is keeping them in debt and working until they’re dead (ok, maybe that’s a slight exaggeration).

Whether you’re doing okay financially really depends on your goals, though if you are 42 with over a million in investments, I’d say in general, you should be fine. Whether you have enough to retire depends on your annual expenses in retirement. Right now, you have 479+650=1129k. According to the 4% safe withdrawal rate (SWR) general rule of thumb, if your expenses are less than ~45k a year, you’ll be fine retiring today on what you have saved.

If you want more specific feedback into your situation. I’d recommend posting a proper case study.

[Krishna]

@Freedomin5

I forgot to mention my annual expenses, thank you for reminding me! :)

Mortgage + Insurance  + Property Taxes = 2100
Groceries, Utilities, and all other expenses: $1600 - $1800
I support elderly parents: $1000


I am hoping to pay off mortagage by this time next year, so that will slice off ~1000 from the 2100.

[use2betrix]

You are doing just fine. I’d be surprised if many/any of your colleagues are/will be millionaires at your age, as you are.

Having absolutely no idea of their situation, it is worthwhile to remember you’re in a single earner household. Imagine the flexibility in purchases if you had 1.5x-2x your income. My wife and I are also a single earner household (I work, she makes our lives soooo easy)! The trade off is worth it and no regrets! In this day and age, single earner households are becoming less common. Often not so people can save and retire early, but often just because people consume so much more.

[Telecaster]

However, everyone I work with speak about leasing cars, and investing the money. Same with buying houses, they pay the lowest down-payment possible saying they are investing the rest. A few people are able to buy car in the matter of hours. I generally think about a month in advance before buying a car, by speaking with several dealers to see who is giving the lowest price.

In a low interest rate environment, putting the minimum down payment on a house and investing the rest makes sense.  BUT you actually have to invest the difference.  Many people use this an excuse to put the minimum down and then never follow through on the investing part. 

Leasing can make sense because lease payments are typically lower than car loan payments.  BUT that's only beneficial if you are getting a new car every three years (or however long the lease term is).   And maybe not even then.  If you are keeping your car longer than three years, it is almost always cheaper to buy.   And I think most people on this board would say you should keep your car longer than three years.  Cars are expensive and owning a car for a long time typically lowers you cost of ownership.  If you invest that difference, you are financially way head of those who lease, and it isn't close. 

I'm of the age where discussions of money are no longer taboo with friends.   I'm continually shocked at the spending.   I think your approach of avoiding debt--even if you are leaving pennies on the table--is the more prudent one. 

[namasteyall]

Dear Krishna

 What you are doing is correct. There will be plenty of high earning losers who will tell you to waste money. Or how one simply can't live without debt! Or that you cannot be happy without this or that expensive bauble or experience. Nonsense! Don't argue with them, just listen and nod while you continue optimizing your finances.

So, increase your earnings, maybe learn more, change companies, get more benefits, etc. and save as best you can. The early pages in the Badassity column are inspiring! Hope your wife understands money, saving, investing and taxes. This wonderful site has many wise, helpful people who can guide and help on many issues.
So ask your questions!
 
Ensure you have fun: plenty of wonderful free or really cheap events, parks, movies, concerts, etc. are almost everywhere. Ensure you are both healthy with good food, exercise, sleep and leisure. Go forth and learn and earn even more! Enjoy your achievements today and later, with ample, secure finances.

 

[Nutty]

Yes, what you are doing is correct.  You are choosing to save.

We drive older cars and choose to save.  I value the savings.  I work with people who value the latest and greatest and are willing to pay for it and sacrifice saving to "get it now".  Don't cave into peer pressure to chase the newest.  The fact that you are posting here shows where your goals are. 

Each person chooses their path.  You have chosen yours and are doing very well.  Keep up the good work.

[ixtap]

It sounds like you have been prepaying a low interest mortgage. I would not have done that, but I also wouldn't do a cash out refinance, even at low rates.

We took advantage of 0% APR credit card offers last year to buy ibonds before the rate dropped. DH had an issue at work that caused cash flow to be delayed (HR had an issue, to be precise) and I found it stressful to pay those off on time, even though we are FI so it was just a question of moving money around differently than usual.

[Laura33]

A good rule of thumb for financial success:  if "everyone" is telling you you're wrong, keep doing what you're doing.  Because "everyone" as a whole sucks at money management, in particular in prioritizing long-term needs over short-term wants.

Your approach will get you to financial success, period.  Your numbers show that.

Are there ways to make your money work harder?  Sure.  Home ownership is one of the few ways normal people can take advantage of leverage, which, if successful, generates better returns.  OTOH, it also comes with more risk -- just ask all those folks who were underwater in their homes c.2008-2009.  And current interest rates mean that these opportunities are significantly less than they were a few years ago.

The most important benefit from your high income and low expenses is that you do not need to optimize for every penny.  You are probably already financially independent (given how little remains on your mortgage) -- you've either already won the game or are just about to do so.  So there's no need to even think about changing anything you're doing, unless you decide you want to just for fun.

I'd also bet you that "everyone" who is telling you these things is not financially independent.  So whose approach is actually better? 

[zolotiyeruki]

Here's my blunt response:  Yes, if you insist on owning 0-3-year-old cars for the rest of your life, the monthly payment may be less if you lease instead of buying.  But if you're looking to optimize how much you can invest, leasing or buying a new car are both terrible choices.

Here are a few things to keep in mind when you have such conversations:
1) Your net worth is over $1.6 MILLION DOLLARS.  And you're just middle aged.  And you're doing it on a single (albeit high) income.  The results stand on their own.  Are your peers in a similar position?
2) Saying "I'm leasing so I have more money to invest" is an attempt to rationalize a poor financial choice.  It's like saying "I play blackjack instead of the slots, because the payout percentage is higher." New cars are financially suboptimal, regardless of whether you buy or lease.  If your coworkers were actually looking to increase their retirement contributions, they would save up, buy a good, reliable, economical, used (GREU) car, and then invest their excess cash flow.
    2a) They'll be leasing forever.  Pay cash for a GREU car, and your excess cashflow will very quickly make up the difference.  The math is simple enough, and the payback period fast enough, that you can do it in your head.  Pay $500/mo forever to lease, or save up for a year and pay $6k for a GREUcar, and then have $6k/year to invest for the next 10-15 years.
    2b) Even if you purchase a brand new car and finance it, the loan will be paid off eventually, while your coworkers are still paying a monthly lease.
    2c) Don't forget the significant insurance cost savings from driving a GREU car instead of leasing.
3) There's nothing wrong with re-evaluating your choices when presented with alternatives, but remember that your current choice may still be the best for you.
4) You are only privy to a tiny sliver of your coworkers' financial situation. You don't know how much they have saved for retirement, or even if their hypothetical savings from leasing are actually being invested.
5) On the house front, their chosen path may be the correct one for their situation and risk-tolerance.  It is mathematically optimal to make a minimum down payment, and stretch out the loan as long as possible, if you invest the difference, and if the stock market returns over the same period are greater than the interest rate.  But that's not guaranteed.
6) Your values and goals can be different than your coworkers', and this difference can lead to different choices which are right for each person.  Most MMM forumgoers are here because of a shared interest in early retirement.  You and your wife appear to value avoiding debt instead of optimizing your investment contributions, and value investing over consumption.  Your coworkers may value driving a new car over early retirement.  In MMM land, that's crazy talk, because we recognize that the fancy gadgets on new cars don't significantly improve our happiness.

[Krishna]

As @zolotiyeruki said regarding cars, I couldn't understand their math. They said they can give their car back anytime they want and still save money. I calculated it and it came to like $300 in like 3 years (if their idea of investing the money and taking out a loan is true). I would rather buy a cheaper closer to base-model car (not fully loaded car) and then not have to worry about having to pay monthly payments.

My idea of monthly payments is this: When I divide an item - mostly non-necessities - that cost X and dividing it into N month's monthly payments, I have to pay X/N fixed payments every month, assume no interest - an highly unlikely scenario. This increases my fixed monthly expense and if there is a job-loss or pay-cut, all these things will be in jeopardy.

Now, if I want that item and it costs X, I can save up that money (let's say like 5X or 6X/month) and then in a few months just buy the item out-right. This way if any catastrophe like job-loss, or disease or something that reduces my ability to pay happens, things won't go from bad to worse.

When they asked my rationale and I told my math they looked at me like I am a dummy.

Glad to see that what I am doing is not a total dumb move.

[reeshau]

Thinking In terms of payments implies they believe they need to go into debt, and they will never stop making payments.  They may not believe you if you describe a different approach.

If you Google "average savings by age," you will see that you are way above average.  This is great, and shows that your different approach is getting different results.  It is also sad, because the majority of Americans are headed for modest retirements, which is probably would not be what they desire, if they stopped to think about it.