Author Topic: Invest vs Pay Down House  (Read 8749 times)

Nevs

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Invest vs Pay Down House
« on: February 26, 2016, 06:04:00 AM »
Hi all,

I'm going to ask a fairly common question, but wanted some advice based on my circumstances.

Financial Overview
My wife and I combined bring in about 6000$ a month in take home pay after employer tax withholding and health insurance.

We save around 2500$ a month outside of budgeted expenses.

We have a 131k mortgage at 4% interest.

We currently have 2 months cash cushion based on my monthly budgeted expenses, so around 10k cash.

Problem Statement
The elephant in the room: We both have fairly volatile jobs (or at least perceived this way)

I am a consultant in IT, with a small startup company of about 8 people. The company is doing very well, but I also have the least experienced on the team and would likely be the first to go if the company could not find work. My wife is a school teacher currently on a limited contract and we have no idea if she will be renewed for next year yet.

I've been worried about the volatility of the these positions, but believe the work experience we are receiving from them to be worth the risk. We've also been doing this for 2 years, and I feel like I need to ease off the concern a bit as everything always seems to work out well for us. We have great work ethic and I'm becoming less concerned about our future job position.

Potential Solutions
I can't decide, based on the volatility of our jobs, whether to invest in stocks, pay down my house, or just keep a big cash cushion just in case.

Here are the options I've come up with:

1.) 6 months liquid cash cushion that we could likely stretch out to 9 months in a pinch
2.) 3 months cash cushion (stretch to 5-6) with the house paid down significantly + HELOC for emergencies or job loss
3.) 3 months cash cushion with maxed out retirement accounts (IRA, teacher 403b, etc.)

Again, we bring in about 2500$ at the end of the month that we can put towards anything, with more if we get raises.

My thoughts: pay down the house and get a HELOC.
Why: Best case scenario, we pay down the house. Worst case scenario I can use the HELOC as "springy debt" and just build everything back up. I miss out on some returns, but it's certainly better than keeping 6 months in cash, isnt it?

I'm not a fan of keeping lots of cash on hand, as this money is just eaten up by inflation, but I also don't want to put ALL of my money into a spot where I can't at least utilize some of it in a pinch. Perhaps a 50/50 split between investing and paying the house would be in order?

My long term goal:
1.) FI by age 40-45

I'd like to know your thoughts on this! Thanks.
« Last Edit: February 26, 2016, 06:23:34 AM by Nevs »

ender

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Re: Invest vs Pay Down House
« Reply #1 on: February 26, 2016, 06:20:44 AM »
How much of a cash reserve do you have in the first place?

If you guys have $1000 saved then the answer is much more obvious than if you have $15k.

Nevs

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Re: Invest vs Pay Down House
« Reply #2 on: February 26, 2016, 06:22:41 AM »
How much of a cash reserve do you have in the first place?

If you guys have $1000 saved then the answer is much more obvious than if you have $15k.
Good question, I'll add it to the top. Based on my current budgeted expenses, we are sitting at around 2 months of expenses covered as of today. So, around 10k cash.

Jack

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Re: Invest vs Pay Down House
« Reply #3 on: February 26, 2016, 06:56:00 AM »
Your math doesn't add up: you say you take home $6000/month and save $2500/month, which implies that you spend $3500/month. Then you say your $10000 emergency fund would cover two months of spending, which implies that you spend $5000/month. Which is it?

My general advice (at today's typical cheap mortgage interest rates) is pretty much always to not pay the mortgage any faster than you have to and invest the difference.

The fact that you're also asking about emergency fund vs. HELOC complicates that a little, though... What's your loan-to-value ratio? Could you get a HELOC now without paying down any additional principle?

Given the information you've already provided, I'd say go with option #3 (3 month emergency fund + maxed retirement accounts) and that you already have enough saved up for it.

Nevs

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Re: Invest vs Pay Down House
« Reply #4 on: February 26, 2016, 09:53:13 AM »
Your math doesn't add up: you say you take home $6000/month and save $2500/month, which implies that you spend $3500/month. Then you say your $10000 emergency fund would cover two months of spending, which implies that you spend $5000/month. Which is it?

My general advice (at today's typical cheap mortgage interest rates) is pretty much always to not pay the mortgage any faster than you have to and invest the difference.

The fact that you're also asking about emergency fund vs. HELOC complicates that a little, though... What's your loan-to-value ratio? Could you get a HELOC now without paying down any additional principle?

Given the information you've already provided, I'd say go with option #3 (3 month emergency fund + maxed retirement accounts) and that you already have enough saved up for it.
Sorry I wasn't more clear on the first part, and its likely an issue I need to sort out. I use YNAB as a budgeting tool and I generally allocate money to future bills. So, for example, car insurance might be a lump sum 600$ every 6 months so I budget 100$ a month to cover that (don't worry, my bill is NOT that high)...I also have budgets set up for car maintenance, potential medical bills, etc. All of this amounts to around 5000$ a month budgeted for current expenses + potential one-offs. Therefore, $10,000 would cover my budgeted numbers which include extra expenses and that's why I implied that I could stretch this for another 2-3 months at least under the assumption that none of these one-off expenses pop up.

I never quite settled on how I should budget for those kinds of one-off expenses, so at the moment just set aside a set amount each month to at least cover most of it when it happens, and then adjust my other numbers around to hit anything left over. But I would say the average we actually spend in a given month rounds out to be 3500 a month. Once I can build some equity and savings I'll likely adjust my budget to only include what we know we will spend each month and rely on another factor for emergencies (or a specific budget category).

fiveoh

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Re: Invest vs Pay Down House
« Reply #5 on: February 26, 2016, 10:10:58 AM »
If it worries you its an emotional decision not just a financial one.  I'd do what makes you the most comfortable which you already said is paying down t he house.   You may make more money by investing, you may not, but peace of mind is worth a lot of money(to me at least).  You could also do 50/50 between investing and house paydown.

Jack

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Re: Invest vs Pay Down House
« Reply #6 on: February 26, 2016, 10:12:23 AM »
Just keep it simple: add up your yearly spending (which includes "one-offs") and divide by 12 to get your actual average monthly spending. Then multiply by X (where X is the number of months you want your emergency fund to last), fund your emergency fund up to that amount, and invest the rest.

chubbybunny

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Re: Invest vs Pay Down House
« Reply #7 on: February 26, 2016, 10:24:32 AM »
The reports on the older version of YNAB can show you exactly how much you spend in an average month.  I think they are working on more reports for the web version, but you've got the information there.

I think most of the discussion about paying down a mortgage comes at the point once you've got your 6 month emergency fund AND retirement savings setup.  At this point, the question is whether to save 4% (less taxes), or try to earn more in the market.

Where you are right now, I would suggest 6 months savings first, then max out retirement, then pay down house.  You should not be in a rush to pay off your mortgage until you've already got that stuff setup.  The new YNAB is great because you can allocate money to 6 months in advance, so tracking what you can spend in the current month makes it less tempting to touch anything else sitting there.

I'm slightly biased as I use a "high rate" checking for my emergency fund.  It pays an AMAZING 1.5% on the first $25,000.  For us, that is enough of an emergency fund; the rest we  have in retirement accounts and a brokerage account.  If I go over $25,000, I can put more toward house.  That's just the way we role...

boarder42

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Re: Invest vs Pay Down House
« Reply #8 on: February 26, 2016, 11:38:18 AM »
option 1 paydown house - so you're paying down your house and you get laid off (typically this is during an economic down turn) in economic downturns banks can call for full payment of any heloc.  so now you have all this money tied up in your house and dont have any living expenses to speak of if you go over 5 months with out a job.  your bank doesnt care if you have been pumping money in if you cant make payments you lose your house.

option 2 invest - you're investing and accumulating money you get laid off now you have a stock pile of money you can use to pay your mortgage and living expenses for much longer than just your 10k ... and this money becomes your security. 

feelings should be left at home and math and logic should reign.  b/c in your safety net you're trying to create with a paid off mortage you're actually less safe for your given concerns.

Syonyk

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Re: Invest vs Pay Down House
« Reply #9 on: February 27, 2016, 11:14:13 AM »
option 2 invest - you're investing and accumulating money you get laid off now you have a stock pile of money you can use to pay your mortgage and living expenses for much longer than just your 10k ... and this money becomes your security.

Or you end up unemployed and needing cash during a market downturn and don't have the buffer to ride it out, so you have to take money out at significant losses.  This can, and does happen. 

Quote
feelings should be left at home and math and logic should reign.  b/c in your safety net you're trying to create with a paid off mortage you're actually less safe for your given concerns.

How do you "logic" the future of the stock market?

And depending on the nature of the people involved, feelings are certainly worth paying attention to.  I run a more conservative portfolio than I might otherwise, with some pretty large cash buffers, because my wife is happier with things that way.  I lose some potential gains, avoid some potential losses, and have a wife who is very comfortable with where we are financially.  Could I probably have higher returns if some of that cash were invested?  Perhaps.  My investment accounts have been taking a pretty good beating lately (Betterment & index funds), so... *shrug*  I'm fine with the cash buffer.

mountainstache7

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Re: Invest vs Pay Down House
« Reply #10 on: February 27, 2016, 12:17:58 PM »
First things first, get your emergency stash increased. At least 6 months of expenses, but due to the nature of your jobs, you may want to consider more. Would it be easy to pick up another job in your location? I live in an area where there are no jobs for what I do, so I have to put a higher value on my emergency stash as it would take me longer to find a job with full-time telecommute. Once you get that emergency stash built up, then you can reconsider whether you should attempt to pay off the home or invest elsewhere.

boarder42

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Re: Invest vs Pay Down House
« Reply #11 on: February 27, 2016, 04:16:52 PM »
option 2 invest - you're investing and accumulating money you get laid off now you have a stock pile of money you can use to pay your mortgage and living expenses for much longer than just your 10k ... and this money becomes your security.

Or you end up unemployed and needing cash during a market downturn and don't have the buffer to ride it out, so you have to take money out at significant losses.  This can, and does happen. 

Quote
feelings should be left at home and math and logic should reign.  b/c in your safety net you're trying to create with a paid off mortage you're actually less safe for your given concerns.

How do you "logic" the future of the stock market?

And depending on the nature of the people involved, feelings are certainly worth paying attention to.  I run a more conservative portfolio than I might otherwise, with some pretty large cash buffers, because my wife is happier with things that way.  I lose some potential gains, avoid some potential losses, and have a wife who is very comfortable with where we are financially.  Could I probably have higher returns if some of that cash were invested?  Perhaps.  My investment accounts have been taking a pretty good beating lately (Betterment & index funds), so... *shrug*  I'm fine with the cash buffer.

So show me the situation where losing you job anf having pumped money into your house works out. If it isn't paid off

You may as well give up all retirement goals if you don't buy into the fact that the market goes up.  Or find something that doesn't apply like property management.

I mean feel whatever you want to feel that's your prerogative but at the end of the day you can only invest based on historical return.

So bury your money in the backyard and hope for no inflation. 

Bottom line you can't Mathematically or logically defend your stance. 

Guy has 100k loan and 50k to invest or pay down loan.

Person 1 pays down loan and instantly gets laid off has 50k in debt and no income. 

Person 2 invests and money is cut in half due to down economy had 25 k when he is laid off at same time.

But go ahead and use feelings

William Cannon

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Re: Invest vs Pay Down House
« Reply #12 on: February 27, 2016, 04:17:13 PM »
I agree with MS7.  I'm in a similar situation as the OP with employment in a volatile industry.  I saved 11mo of emergency funds (not current expenses).  I actually got to like 3 years of expenses, before I realized I was being paranoid.  So I took my savings down and put $45k against my mortgage.  Next, I put a plan to pay the balance of the mortgage note in 2 years.  The final payment was for 12 months.  The current payment that was do and then the 11 months from savings I wouldn't need to keep in case I lost my job.  Everyone has their own risk tolerance and views of investing.  I look at my home as my favorite place on earth, and not entirely as an investment.  As a result, I now sleep much better knowing that as long as a I pay my property taxes, my home is mine. Period.

Tapa


boarder42

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Re: Invest vs Pay Down House
« Reply #13 on: February 27, 2016, 04:20:22 PM »
Bottom line stop thinking and use math and logic.  Life isn't that hard just be frugal and maximize returns

boarder42

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Re: Invest vs Pay Down House
« Reply #14 on: February 27, 2016, 04:29:47 PM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

boarder42

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Re: Invest vs Pay Down House
« Reply #15 on: February 27, 2016, 04:31:56 PM »
I know I own my house. Yippee I wasted money.

Syonyk

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Re: Invest vs Pay Down House
« Reply #16 on: February 27, 2016, 05:37:26 PM »
You may as well give up all retirement goals if you don't buy into the fact that the market goes up.  Or find something that doesn't apply like property management.

I entirely disagree.  One can have perfectly valid, achievable retirement goals that do not rely on the market going up.

One such approach might be:
- Fully own one's relatively inexpensive land and home in a low cost of living area with low property taxes.  Perhaps throw up some small scale solar for basic energy needs.
- Develop the property through gardens, local livestock (chickens/rabbits/goats/etc), and perhaps a small fish pond such that one can provide for the bulk of one's own food needs and, preferably, have an excess to trade/sell for other needs.
- Save up something in excess of one's expected minimum needs for property taxes and the like.
- Develop hobbies that are inexpensive to engage in and pay for themselves, with the ability to scale them up a little bit as needed for some spare income.

It's a system of retirement that is largely independent of "the markets" through self sufficiency and low cost of living.  It's probably not for everyone, but it's pretty low risk.

Quote
So bury your money in the backyard and hope for no inflation.

I don't prefer my back yard, but I do keep a non-trivial amount of cash on hand.  I don't lose that much even with opportunity cost and inflation considered, and it's a very strong hedge against "not having resources on hand in the event of a local disaster."  ATMs and the like aren't perfect, and neither are credit cards.  Of note, neither of them work worth a damn without power.

Quote
Bottom line you can't Mathematically or logically defend your stance.

Looking at all of the headwinds against the markets (climate change and related costs, peaking of conventional oil production and the 2-3 year lag for production to respond to demand, the "bubble economy" of the last 15 years), I care somewhat more about risk reduction than gains.  Especially since we've been saving up to buy a house, which may very well end up being a cash purchase because of... a lot of annoying factors.

From the perspective of "theoretical maximizing of my money in a rising market," I agree.  I don't have the best option.  I just question the assertion of endlessly rising markets, and my wife & I care about things other than a few more dollars in the bank.  I certainly intend to "retire early" and not work until I'm 60, but I can also rely on the fact that I'm not planning on just investment income to support me - I tend to find profitable little hobbies to play with.

Quote
Guy has 100k loan and 50k to invest or pay down loan.

Person 1 pays down loan and instantly gets laid off has 50k in debt and no income. 

Person 2 invests and money is cut in half due to down economy had 25 k when he is laid off at same time.

Well, step 1 in my book would be about a $25k emergency fund, so neither situation would really matter that much.

Bottom line stop thinking and use math and logic.  Life isn't that hard just be frugal and maximize returns

If your advice begins with "stop thinking" and continues to "use math and logic," you've created an amusing contradiction, since "using logic" would be a form of thinking.

I'm "maximizing returns" of things I care about, which is low risk, a happy wife (who comes from a very frugal tradition with a severe distrust of markets), and flexibility.  If we have more money some years, we can travel a bit more, and if we have less, we cut back and do more things locally.  Does this mean I might work a few more years than an "optimal market projection" simulation might indicate?  Sure.  But I can do it part time, more or less on my own terms, doing stuff I like doing.  It really doesn't bother me.

I know I own my house. Yippee I wasted money.

That's one way of looking at it.  Another would be 15-20 years of 4%-ish returns from not having a mortgage, regardless of what the markets do.

ender

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Re: Invest vs Pay Down House
« Reply #17 on: February 28, 2016, 04:09:29 PM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

Dude chill out, not everyone has the same priorities as you.



tobitonic

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Re: Invest vs Pay Down House
« Reply #18 on: February 28, 2016, 04:27:26 PM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

Dude chill out, not everyone has the same priorities as you.

+1. We paid ours off in 3 years, no regrets.

Syonyk

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Re: Invest vs Pay Down House
« Reply #19 on: February 28, 2016, 06:45:48 PM »
+1. We paid ours off in 3 years, no regrets.

"But think about all those theoretical dollars you don't have!"

tobitonic

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Re: Invest vs Pay Down House
« Reply #20 on: February 29, 2016, 06:41:02 PM »
+1. We paid ours off in 3 years, no regrets.

"But think about all those theoretical dollars you don't have!"

LOL. You hit the nail on the head. :D

boarder42

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Re: Invest vs Pay Down House
« Reply #21 on: February 29, 2016, 09:12:24 PM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

Dude chill out, not everyone has the same priorities as you.

Correct me if I'm wrong but this is a forum for retiring as early as you can. And the OP had a question of investing or paying down his mortgage.

There is only one answer to that question based on historical returns.

And his main concerns regardless of an efund are actually lower risk if he chose to invest vs this paydown and heloc idea he has.

To each his own but feeling safer and being safer are 2 different things. IMO based on all data presented he's taking the option of playing Russian roulette with 2 bullets in the chamber vs 1. Risk can be quantified and OP'S safer assumption is riskier than taking a path of investing and not paying down a mortgage

ShoulderThingThatGoesUp

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Re: Invest vs Pay Down House
« Reply #22 on: March 01, 2016, 06:06:47 AM »
I have a paid-off house and I still agree with boarder42. Tax-deferred accounts are amazing and have to come first.

ooeei

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Re: Invest vs Pay Down House
« Reply #23 on: March 01, 2016, 06:43:17 AM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

Dude chill out, not everyone has the same priorities as you.

Correct me if I'm wrong but this is a forum for retiring as early as you can. And the OP had a question of investing or paying down his mortgage.

There is only one answer to that question based on historical returns.

And his main concerns regardless of an efund are actually lower risk if he chose to invest vs this paydown and heloc idea he has.

To each his own but feeling safer and being safer are 2 different things. IMO based on all data presented he's taking the option of playing Russian roulette with 2 bullets in the chamber vs 1. Risk can be quantified and OP'S safer assumption is riskier than taking a path of investing and not paying down a mortgage

You are wrong.  This is a forum about achieving happiness, resource reduction, and is often focused on financial freedom.  It's certainly not a forum that mandates everyone aggressively invests in stocks, and only invests in retirement accounts.  If I remember correctly, the founder of this forum paid off his house early.

That's not to say those things are a bad idea, but to suggest that this forum/website requires someone to do that is absurd.  Feelings of safety are quite important, as stress creates all sorts of problems (mentally and physically).  It's important to point out the most optimized path for the OP, but getting pissed at him for not doing it and telling him to "just burn" his money instead is not the approach I'd take.  Point out the most optimal path, that way he knows the cost of his feeling of security.  The choice of whether it's worth it is up to him.

James

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Re: Invest vs Pay Down House
« Reply #24 on: March 01, 2016, 07:12:00 AM »
Potential Solutions
I can't decide, based on the volatility of our jobs, whether to invest in stocks, pay down my house, or just keep a big cash cushion just in case.

Here are the options I've come up with:

1.) 6 months liquid cash cushion that we could likely stretch out to 9 months in a pinch
2.) 3 months cash cushion (stretch to 5-6) with the house paid down significantly + HELOC for emergencies or job loss
3.) 3 months cash cushion with maxed out retirement accounts (IRA, teacher 403b, etc.)

Again, we bring in about 2500$ at the end of the month that we can put towards anything, with more if we get raises.

My thoughts: pay down the house and get a HELOC.
Why: Best case scenario, we pay down the house. Worst case scenario I can use the HELOC as "springy debt" and just build everything back up. I miss out on some returns, but it's certainly better than keeping 6 months in cash, isnt it?

I'm not a fan of keeping lots of cash on hand, as this money is just eaten up by inflation, but I also don't want to put ALL of my money into a spot where I can't at least utilize some of it in a pinch. Perhaps a 50/50 split between investing and paying the house would be in order?

My long term goal:
1.) FI by age 40-45

I'd like to know your thoughts on this! Thanks.


Your long term goal is FI. Paying off the house is just one small part of that, you can tackle that as a lower priority. Your highest priority is savings, and your second highest priority in reaching FI is investing. Option 3 is where your excess money should be going.


Your cash cushion or emergency fund should be whatever size you need it to be. I think you have a good start of an emergency fund in your situation, so get your retirement accounts maxed out right away. That should not deplete the amount you are saving every month. If it does, then you need to cut spending to meet your goal, not reduce your investing.


So you follow option 3 and max tax advantaged investing, use the rest of your savings to build cash cushion to your comfort level, I think your situation warrants a larger cushion so I would build up from your "2 month" number. I also agree with others who have said that your number of months of cash cushion or emergency fund should not be based on some guess of lower spending if you were running out of money. You don't know why you will need your emergency fund or for how long. I would start by having 2 months of "real" emergency fund, which is actual spending including incidentals. As someone else said, yearly spending divided by 12 is a good way to estimate.


Once you have done that, max your retirement contributions and built up an emergency fund that is reasonable, then you can decide what to do with the excess savings. I would suggest putting that in investments as well, but you could also pay down the house with that, I don't think there is any big rule on what to do next. But financially you are better of investing that money, it will grow in the market faster than the savings from paying down the house, and you can access that money in an emergency.

Manguy888

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Re: Invest vs Pay Down House
« Reply #25 on: March 01, 2016, 07:22:28 AM »
Why not open a new investing account and call it "mortgage payoff"? Mentally, you tell yourself "this money is for paying off our mortgage unless we need it for an emergency".

Tweak the asset allocation to be a bit more conservative than your normal investing, but with an expectation of beating 4%, at least based on historical returns.

This is a good hedge in my opinion. You get some of the market upside with access to liquidity without a HELOC. And if you have no emergencies and your account hits 130k, you can press the big red button and erase your mortgage.

Granted, it's sort of a mental-accounting shell game, but sometimes these can be super helpful.

Saving in Austin

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Re: Invest vs Pay Down House
« Reply #26 on: March 01, 2016, 08:00:38 AM »
I used to pay down my mortgage as quickly as I could before I discovered MMM and other early retirement sites. I had a $288K mortgage at 3.875% and I had no confidence in my ability to invest. I just looked at it as guaranteed saving of interest payments.

3 years ago I refinanced down to a $180K at 2.625% and made a couple more $10K or $20K payments before I learned how to invest with Vanguard. I'm now have about 10 years and $130K left on the refi loan.

It was a real emotional adjustment for me and I realize that many financial mistakes are made because of emotions. The math may come down on paying it off slowly, but I was so freaked out about the $930 monthly interest payment at the beginning, I don't know if I could have done it.

Anyway, if I was the OP I would try to refi and pay it off slowly. Best of luck.

Nevs

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Re: Invest vs Pay Down House
« Reply #27 on: March 01, 2016, 10:50:28 AM »
Looks like I may have stirred the pot a bit with this question! I think I have a better grip on a plan now, thanks a lot for all these great comments! Here's the breakdown:

I looked in YNAB and we spend, on average, $3600 per month. This leaves $2400 left over currently. Here are my goals for any left over returns in a given month, in order of importance

1.) 6 months savings cushion accounting of 21,600 (3600*6)
2.) A separate emergency fund of $5,000*.
3.) Fill up my wife's teacher retirement account to the tune of $17,500 every year (once 1 and 2 are complete)
4.) Invest the remainder into Traditional IRA's for my Wife and I (total of $11,000)


Questions
1.) What would be a great #5? As our income increases, I don't believe it will be difficult to meet #3 and #4 annually. If my employment holds up, I suspect I will see a very heft income increase over the next couple of years given the nature of my work and the amount my co-workers are earning. Would step 5 be to invest 11,000 into a Roth IRA? A standard brokerage account for money needed between 45 and 59 1/2?**


*My understanding is it's best to separate out an "emergency fund" and a "cash cushion" as two things. The emergency fund is in the event of a large lump payment that needs to be made for car repairs, medical bills, water heater breaks, etc. Whatever is depleted from this will be topped off if we use any of it back to the 5k total. The cash cushion is specifically for job loss, and meets all of our common monthly expenses, the total 3600$ also accounts for any incidentals we've also had over the past year, so these numbers should be pretty safe.

** While MY goal is to try and hit the point where I COULD quit my job at 45, my wife intends to continue her work until standard teacher retirement age as she loves the work she does. This puts us in a good spot, but may tweak the plan a bit.


Thanks again for the fantastic replies!

mountainstache7

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Re: Invest vs Pay Down House
« Reply #28 on: March 01, 2016, 11:01:10 AM »
+1 on ooeei's statement. Every person's situation is different and getting to FI or FIRE for that matter may not be the same path. As I have read on this forum many times, our goals are all the same and we're splitting hairs on the finer points of how to get there. I'm not saying any one way is wrong, but for myself I valued paying off my house early as it gave me some level of freedom and security faster than waiting for a much larger number in order to retire early. I may be forced to work a bit longer to get to FI/FIRE, but I'll live with it. I will still retire early all the same and when I get there I can wonder/kick myself for not doing it differently, though I'm guessing I won't care once I'm there. :)

PARedbeard

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Re: Invest vs Pay Down House
« Reply #29 on: March 01, 2016, 11:18:04 AM »
Hey Nevs,
Thanks for posting this question. I am always on the fence about this myself. Your above plan looks good, though I would throw the $5,000 from #2 straight into your wife's 403b. A 21k cash cushion is pretty substantial (esp considering a 131k mortgage), and, to me, it would make sense to get that money working for you right away. Shop around to find a decent money market or checking account that is paying a decent return to stash the 21k in.

As for a #5, you have two good choices: 1) Open a taxable account and invest in low-cost dividend funds or ETFs. 2) Pay down the mortgage. Frankly, this is the stage I am in myself. After setting up an emergency fund, contributing to the 401k, and maxing out our ROTHs, I'd like to hear what others have to say. At present, I set aside half of our extra money each month towards a taxable account and the other half I pay towards the mortgage. While this may not be as efficient as simply investing all of the excess money, it is a psychological thing for me. I get to see the long-term dive in the interest I am paying the mortgage company, plus I know I am setting money aside for my future.

As others have said, the race to FI is a personal path. Efficiency is key, but it is more important to be able to be comfortable in your decisions and not overly stressing on the goal.

mountainstache7

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Re: Invest vs Pay Down House
« Reply #30 on: March 01, 2016, 11:29:21 AM »
@PARedbeard at the stage your at, there have been numerous conversations on the forum that if your mortgage interest rate is 4% or below it's more efficient to invest the extra money and let the house pay down over time. I'd have to find these posts again, but the numbers seem to be correct. Only other thing you'll have to consider is the rest of your external factors. I preferred killing the mortgage because i'm rural and there is no work from what I do here and any other alternatives were considerably less. Now that the mortgage is gone, i can do considerably less and still invest if my hand is forced. If I was living in an area with an abundance of jobs for what I do, I would likely choose the investing path as my worry about not finding work for an extended period of time would be gone. All that being said, I also had a much larger emergency stash that was part of final payment as my cost of living dipped considerably after payoff. Was my path the most efficient? Maybe not, but I had to consider more than just numbers in a spreadsheet. Do a search in the forums, this subject has come up often lately on most efficient path to FI/FIRE.

MickeyMoustache

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Re: Invest vs Pay Down House
« Reply #31 on: March 01, 2016, 11:32:27 AM »
I need to stop typing. But these comments are absurd.

If YOUR ARENT MAXING YOUR TAX ADVANTAGED ACCOUNTS DTOPVPAYING DOWN YOUR MORTGAGE.

JUST GO HOME AND BURN 25% OF YOUR TAKE HOME PAY EVERY NIGHT. SEE HOW THAT FEELS BC THATE WHAT you're DOING

Dude chill out, not everyone has the same priorities as you.

Correct me if I'm wrong but this is a forum for retiring as early as you can. And the OP had a question of investing or paying down his mortgage.

There is only one answer to that question based on historical returns.

And his main concerns regardless of an efund are actually lower risk if he chose to invest vs this paydown and heloc idea he has.

To each his own but feeling safer and being safer are 2 different things. IMO based on all data presented he's taking the option of playing Russian roulette with 2 bullets in the chamber vs 1. Risk can be quantified and OP'S safer assumption is riskier than taking a path of investing and not paying down a mortgage

I think you're correct here.  Maxing the tax-deferred accounts will be more likely to help him reach his stated goals rather than paying off the loan, which mathematically AND emotionally seems to be more important to him based on his original post of wanting to attain FI @40-45 yrs old.  I'd still invest in taxable over the mortgage even after maxing tax-deferred because the money is more liquid than being locked up in your mortgage.  HELOC implies debt to get your money out, whereas taxable investments imply volatility and possible tax impacts (and short term likely isn't an issue), but no debt.

That said, it took me until this year to make my wife comfortable enough to max her 401k contributions on top of mine, 529s, FSA, etc. 

mountainstache7

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Re: Invest vs Pay Down House
« Reply #32 on: March 01, 2016, 11:34:26 AM »
@Nevs what is there difference between the following two steps?

1.) 6 months savings cushion accounting of 21,600 (3600*6)
2.) A separate emergency fund of $5,000*.

Both appear to be your emergency fund, you probably don't need both. I would hold to 6 months of expenses and if you need to pull some for whatever reason(car/home repair), just replace it when you get the funds when possible.

Step 5 invest in after tax Vanguard accounts or kill the mortgage or do a combo(half of extra money towards Vanguard/half towards mortgage principle or whatever ratio you prefer).

randymarsh

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Re: Invest vs Pay Down House
« Reply #33 on: March 01, 2016, 12:05:14 PM »
I say invest.

As a teacher, what exactly are your wife's retirement options? I'm guessing she has a pension and you mentioned the 403b. But does she have a 457? If so, then she the ability to put another 18K away pretax.

Nevs

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Re: Invest vs Pay Down House
« Reply #34 on: March 01, 2016, 01:19:27 PM »
@Nevs what is there difference between the following two steps?

1.) 6 months savings cushion accounting of 21,600 (3600*6)
2.) A separate emergency fund of $5,000*.

Both appear to be your emergency fund, you probably don't need both. I would hold to 6 months of expenses and if you need to pull some for whatever reason(car/home repair), just replace it when you get the funds when possible.

Step 5 invest in after tax Vanguard accounts or kill the mortgage or do a combo(half of extra money towards Vanguard/half towards mortgage principle or whatever ratio you prefer).
I explained that in the bottom section of that post. The 6 months savings is specifically to get us through 6 months of our common expenses in the event of a job loss, so we have time to find another. The 5k emergency is for one-offs that come up, which we can just top off in case of emergencies. I don't really consider emergency one-off situations the same as job loss. What happens if they both occur at the same time? Meaning, job loss AND a broken water heater. Not likely, but I prefer to keep them separate. It's just easier for me to track this way. Given the current volatility of our jobs, I'd be more comfortable with a little more cash on hand rather than less, It won't slow me down much to hold off a month or two on investing to make that happen in my mind. Then, every dollar left over at the end of the month I KNOW can be placed into the market.
« Last Edit: March 01, 2016, 01:21:29 PM by Nevs »

mountainstache7

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Re: Invest vs Pay Down House
« Reply #35 on: March 01, 2016, 01:51:38 PM »
Sorry I missed that(should not have). Hard to argue with another 5k for emergencies. Only other thing you can try to do is reduce your other expenses not listed.  At 131k and 4% interest rate I assume the mortgage is around 800 per month give or take? Not sure where the other $2800 per month is going but you should definitely try to reduce that number thereby not needing quite as large of an emergency fund.

Jack

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Re: Invest vs Pay Down House
« Reply #36 on: March 01, 2016, 01:55:35 PM »
Looks like I may have stirred the pot a bit with this question! I think I have a better grip on a plan now, thanks a lot for all these great comments! Here's the breakdown:

It's typically a hot-button issue on this forum, yes. We have a strong faction that prioritizes feeling safe, and another strong faction that prioritizes mathematical optimization, despite the risk.

1.) What would be a great #5? As our income increases, I don't believe it will be difficult to meet #3 and #4 annually. If my employment holds up, I suspect I will see a very heft income increase over the next couple of years given the nature of my work and the amount my co-workers are earning. Would step 5 be to invest 11,000 into a Roth IRA? A standard brokerage account for money needed between 45 and 59 1/2?**

No, not a Roth IRA, because you already plan to max a traditional IRA. With IRAs, you only get to invest $5,500 per person, per year total, not per account type.

You're working, but the only work-related retirement account you mentioned was your wife's. Don't you have one too? If so, max it out. Also investigate the possibility of getting an HSA.

If you still have leftover invest-able money after that, a taxable brokerage account, paying down your mortgage (if you're risk-averse), or saving up a down-payment on investment real estate are all good options.

I concur with the sentiment that the multiple emergency funds are redundant. At some point, the opportunity cost of not investing that money outweighs the risk of needing it, and I think 6 months + $5K is beyond that point. After all, you're not even talking about a job loss; you're talking about two simultaneous job losses! And then some other emergency on top of it? That's so unlikely that it's worth taking the risk of having to sell stocks at a loss, or run up a balance on a credit card, or whatever.


Syonyk

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Re: Invest vs Pay Down House
« Reply #37 on: March 01, 2016, 02:30:23 PM »
I concur with the sentiment that the multiple emergency funds are redundant. At some point, the opportunity cost of not investing that money outweighs the risk of needing it, and I think 6 months + $5K is beyond that point. After all, you're not even talking about a job loss; you're talking about two simultaneous job losses! And then some other emergency on top of it? That's so unlikely that it's worth taking the risk of having to sell stocks at a loss, or run up a balance on a credit card, or whatever.

It depends on what makes them comfortable.

I keep a non-trivial amount of cash laying around (both in bank accounts and physical form) because my wife & I are both more comfortable with that.  That we could make more investing it doesn't factor into our decision, because we'd both be more stressed that way.

My wife is more risk-adverse than I am, but also can turn the "let's keep costs down" screws much tighter than I can.  Things balance out.

James

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Re: Invest vs Pay Down House
« Reply #38 on: March 01, 2016, 08:33:52 PM »
I think your reserves are a bit high, and I would be sure to separate reserves from "spending" money. I would combine your emergency fund and 4 months of your cash cushion into a pot and form a CD ladder or some other way of generating some return once interest rates start to climb back up.


But other than that sounds like a great plan, good luck!