The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: jamesbond007 on June 27, 2016, 03:37:02 PM
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Hello Mustachians,
I am pretty sure this questions has been done to death may times. But I want to present my situation.
I bought a house worth $440K with 20% down at 4% in January 2016 with a 30-yr mortgage. I don't have a problem making monthly payments ($2475 PITI+HOA). I also have about $70K cash. It is way too much than what I need for emergencies. So I was wondering about opening a vanguard personal investment account and invest there about $50K and keep $20K truly liquid readily available. I also plan to pay $20K every year towards my principal so I will be out of mortgage in about 9 years.
PITI+HOA is the single biggest expense of mine. I have a daughter who is 2 years old and my wife is a home maker.
What do you suggest I do? Pay off the $50K towards principal (I will continue to pay $20K every year according to my plan) or continue with $20K per year according to my plan(and invest the $50K now in vanguard) or make an extra monthly payment of about $600 along with my mortgage (Don't pay extra 20K eveyr year and instead invest everything in vanguard)?
Please advise.
Thanks.
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Invest. Don't tie up a large portion of your liquid capital into a house. A house is an asset, but it's not liquid - you can't easily get that cash back out. (without selling or renting)
Instead, consider:
1) Max out your 401K contribution to get the dual benefit of saving pre-tax dollars, and reducing taxable income.
2) Max out your HSA account (must have a HDHP to have an HSA account).
3) Max out a T-IRA or ROTH IRA contribution.
4) Invest the $50K in a taxable account.
5) Add $100-to-$200 extra principle payment each month. OR... calculate how much you would need to pay on the mortgage to pay it off just before you reach your FIRE date.
I understand wanting to pay off the house early, but every worker-dollar you sink into a house is a worker-dollar that's not "out there working for you" bringing back growth and dividends.
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As far as the effect on your net worth is concerned, paying off debt is like buying an investment with a guaranteed after-tax rate of return equal to the interest rate of the loan. It's better than leaving it languishing in a savings account, but historically not as good as the stock market, especially if you still have tax-sheltered accounts to access low-cost index funds.
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Great. I am maxing out on my 401K currently but I don't have HSA setup. I will switch to a HSA starting Jan 2017 when I can change my insurance elections provided by my employer. I am currently saving about 50% of my net income and I plan to be FI in about 16 years. I was probably making an emotional decision when I asked this questions. Thanks for your responses you both. I will do the calculation to see how much extra I should pay to pay off my mortgage around the time I plan to be FI.