Author Topic: The right place for every dollar?  (Read 4564 times)

agentac

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The right place for every dollar?
« on: January 07, 2015, 09:19:40 AM »
I need some advice and hopefully someone out there can give me some peace of mind or some ideas.  First off, I am in an extremely fortunate position so please don't hate on me for seeking help. My wife and I both make good money and are both under 30.  However, I have a money "issue". I max out both of our 401ks, with a balance between traditional and Roth 401k that makes the best tax sense at this point.  The remaining money I have should be put into our Roth IRAs, but for some reason I cannot stop paying extra on my house each month.  I hate debt more than anything so I attack it as hard as I can.  I have no other debt.  I want to retire early and I know investments of some type are the way to get there, but I can't force myself to pay less on my house.  At the rate I am going, I will have my house paid off in 4 years and I will be 33. Is it wrong for me to pay so much on my house?  I want to live without a house payment, but I also know that to retire I need income streams.  Can someone smack some sense into me?  My mortgage is 3.125% with around 10 years left if I make minimum payments.  If I don't pay extra on the house, I could max out both mine and my wife's Roth IRAs as well as the 401ks, but then I think I am saving too much.  I know I could get better than 3.125%, but for some reason the debt just eats at me and I want it gone.  Again, I am in a very fortunate position that I do not take for granted, I just want to make sure I use my dollars the best I can for a bright future for my unborn kid(s) and my wife.

pzxc

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Re: The right place for every dollar?
« Reply #1 on: January 07, 2015, 09:30:37 AM »
Everyone has a different level of risk tolerance.  Some people get HUUUUUUGE peace of mind living without a mortgage.  Of those who do not advocate paying off your mortgage early, many of them still include "no mortgage payment" in their calculations about when to FIRE.  (i.e., I need 25x my expenses for a 4% SWR, but if I pay off the house my guaranteed expenses are way lower, allowing me to safely and confidently RE sooner)

However, here is the flip side of the coin.
Inflation is targeted at 2-3%.  Many people (most?) feel the government understates inflation (it has incentive to do so).  If you assume a minimum of 3% inflation, or say a minimum of 3.125% inflation -- that means your mortgage is essentially FREE MONEY.  As in, you'd be silly to pay it off quicker rather than invest your extra dollars. Because the mortgage company is essentially giving you an interest-free loan (counting inflation), so why would you pay that off when you could be getting a return on those dollars?

Each and every person will have different reasons to be attracted to one of the two viewpoints above more than the other. Only you can decide which best fits your investment profile and personality profile.  For some people, the security / peace of mind of no house payment is worth far more than 8% returns in index funds -- those people might go so far as to say, I'm going to be slightly stressed as long as I have a house payment, that stress might take a year or two off my lifespan, no way in hell that's worth 8%.  Other people would say, I'm going to be slightly stressed if I know I'm handling my money in any way other than what is mathematically optimal.

As you can see, it's a subjective matter and there's good arguments for both sides.  Each person must decide for themselves.  Hope that helps you figure out the pros and cons though :)

Le Barbu

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Re: The right place for every dollar?
« Reply #2 on: January 07, 2015, 09:39:10 AM »
If your are in a fortunate position, the choice you make can reflect what you want most, no need to seak for optimal choice. That said, when your tax sheltered accounts are maxed out, repaying mortgage can be a good choice for the peace of mind it gives. If you are in a high tax bracket, tax on non-sheltered account can hit returns...

GoldenStache

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Re: The right place for every dollar?
« Reply #3 on: January 07, 2015, 09:42:58 AM »
I had someone ask me a similar question last week.  I explained to her that you only have a few months left to put money in your 2014 rIRA.  After that you can never put money in the 2014 "bucket" again.  That bucket is gone forever.  Fill that bucket every year because you can only fill that bucket every year.  If you pay off your mortgage early, you can not go back and put money into the buckets that you missed.  Sadly, those buckets are gone :(   

agentac

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Re: The right place for every dollar?
« Reply #4 on: January 07, 2015, 09:46:12 AM »
You guys are awesome. Thank you for taking the time to respond with very good answers.  I think my conclusion is to put money into the "buckets" and if I have remaining money, that can go on the house.  If I really want my dollars to work for me, then paying on a cheap loan isn't going to cut it.  Thanks again!

ThatGuy

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Re: The right place for every dollar?
« Reply #5 on: January 07, 2015, 05:01:37 PM »
I had someone ask me a similar question last week.  I explained to her that you only have a few months left to put money in your 2014 rIRA.  After that you can never put money in the 2014 "bucket" again.  That bucket is gone forever.  Fill that bucket every year because you can only fill that bucket every year.  If you pay off your mortgage early, you can not go back and put money into the buckets that you missed.  Sadly, those buckets are gone :(   

This may be the best argument I've ever read.

viper155

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Re: The right place for every dollar?
« Reply #6 on: January 07, 2015, 07:47:17 PM »
What am I missing in this debate?.......If a mortgage is in line with inflation it is said it is "free money". That would be almost true if it were a straight rate.  But it's not, the interest is compounded over multiple years. So, a 20 year, 240k mortgage at 3.5% will cost you $147,975. A 15 year at the same rate will cost you $68,829. Pay off your mortgage early and pile that money onto what you are already investing and I think you will be ahead of the game. Help me out here....

viper155

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Re: The right place for every dollar?
« Reply #7 on: January 07, 2015, 07:51:22 PM »
I had someone ask me a similar question last week.  I explained to her that you only have a few months left to put money in your 2014 rIRA.  After that you can never put money in the 2014 "bucket" again.  That bucket is gone forever.  Fill that bucket every year because you can only fill that bucket every year.  If you pay off your mortgage early, you can not go back and put money into the buckets that you missed.  Sadly, those buckets are gone :(   

I'm slow....can you explain the last sentence to me?What does a Roth have to do with a mortgage?

kpd905

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Re: The right place for every dollar?
« Reply #8 on: January 07, 2015, 08:31:23 PM »
What am I missing in this debate?.......If a mortgage is in line with inflation it is said it is "free money". That would be almost true if it were a straight rate.  But it's not, the interest is compounded over multiple years. So, a 20 year, 240k mortgage at 3.5% will cost you $147,975. A 15 year at the same rate will cost you $68,829. Pay off your mortgage early and pile that money onto what you are already investing and I think you will be ahead of the game. Help me out here....

A dollar paid toward the mortgage saves you 3.5%, so if you could get more than 3.5% investing minus any tax and fees, then you'd come out ahead by investing.

Le Barbu

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Re: The right place for every dollar?
« Reply #9 on: January 08, 2015, 06:06:42 AM »
What am I missing in this debate?.......If a mortgage is in line with inflation it is said it is "free money". That would be almost true if it were a straight rate.  But it's not, the interest is compounded over multiple years. So, a 20 year, 240k mortgage at 3.5% will cost you $147,975. A 15 year at the same rate will cost you $68,829. Pay off your mortgage early and pile that money onto what you are already investing and I think you will be ahead of the game. Help me out here....

Inflation rate is compounded either

Mr. Green

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Re: The right place for every dollar?
« Reply #10 on: January 08, 2015, 06:24:15 AM »
The raw math is only about the percentages. Ever dollar you put into your house earns you a 3.125% rate of return. If you invested that dollar, history would say you will earn more than that in the long run, something like 9.5% (before inflation, avg. market return). However, if that dollar is invested it could earn a lower rate of return or even lose some value in the short run, whereas the ROR on paying down the mortgage is a constant rate. So I would say it depends on what the focus is of that money. If the focus is a long enough timeline, history would say investing the money will strongly outperform paying down the mortgage. However, I totally get the pull of eliminating debt. Something about knowing you own no one nothing that is irresistible.

Another consideration would be whether or not you have any intention of being a landlord renting that house in the future (if you had intentions to move eventually). For example, the townhouse I currently live in will become a rental when I build our forever house. If I had no mortgage on the townhouse, I would see between $15,000 and $18,000 a year in rental income (after expenses). Based on a 25x multiplier for the withdrawal of money in "retirement," $15,000 yearly in rental income is equivalent to saving $375,000 in a 401k/IRA and drawing 4% of it. So paying down the mortgage might be an even more attractive option if that is a possible end game for you.
« Last Edit: January 08, 2015, 07:00:43 AM by wdanner »