Author Topic: Reader Case Study: Investing vs paying off mortgage  (Read 4497 times)

drawn

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Reader Case Study: Investing vs paying off mortgage
« on: February 12, 2015, 01:10:01 PM »
I am new to investing and looking for some advice/guidance. My goal is to retire from working full-time within the next 5-10 years. I am 27 years old, single, no kids. Here's a look at my situation:

Income:
- 42k after taxes

Current Monthly Expenses:
- Mortgage: $955 per month (106k remaining / 30 year mortgage @ 4.5%)
- HOA: $55
- Cell/Internet: $150
- Power/Electrcity: $100
- Water: $20
- Groceries: $200-300
- Gas: $100

Total: $1,680

Assets:
- 5k in traditional IRA (Vanguard VTSMX)
- 60k in savings account

My employer does not have a 401k program. In my situation, does it make more sense for me to invest more - or should I continue to aggressively pay down my mortgage (which would cut my annual cost of living in half)?

Thanks everyone.

jms493

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #1 on: February 12, 2015, 01:18:36 PM »
You need to invest first and then with what is left over you can start chipping away at mortgage.  I would look to refinance if you can get a rate under 3.5

Debtless in Texas

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #2 on: February 12, 2015, 01:23:14 PM »
Quote
You need to invest first and then with what is left over you can start chipping away at mortgage.  I would look to refinance if you can get a rate under 3.5

+1 on this. You will make more by investing than paying down your mortgage. Also agree with a refi - you can probably do better.

I struggled with investing and wanting no mortgage, but at 2.58% it is just dumb to pay off vs invest.

rocketman48097

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #3 on: February 12, 2015, 01:27:34 PM »
At 4.5%, you should aggressively invest in pre tax accounts.  Anything less than 5% I would invest.  5% or over, I would pay down debt.  Plus, your mortgage interest is tax deductible IF you itemize. 

bgraycpa

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #4 on: February 12, 2015, 02:01:58 PM »
Agreed with all above. Many people on here like the "feeling" of having no mortgage because it makes them feel more secure. I would strongly argue that an individual with a $100k mortgage at 4% with a safety reserve and a $100k investment portfolio is far more secure than an individual with $0 mortgage a safety reserve and little investments.

Setters-r-Better

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #5 on: February 12, 2015, 05:32:43 PM »
Agreed with all above. Many people on here like the "feeling" of having no mortgage because it makes them feel more secure. I would strongly argue that an individual with a $100k mortgage at 4% with a safety reserve and a $100k investment portfolio is far more secure than an individual with $0 mortgage a safety reserve and little investments.

Totally this.

KD

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #6 on: February 12, 2015, 05:50:59 PM »
Agreed with all above. Many people on here like the "feeling" of having no mortgage because it makes them feel more secure. I would strongly argue that an individual with a $100k mortgage at 4% with a safety reserve and a $100k investment portfolio is far more secure than an individual with $0 mortgage a safety reserve and little investments.

Right up until the stock market crashes or another RE bubble bursts.  Ummm, yeah...things such as those will likely rebound given time, but I'm still in my paid for nest w/o all the stress and worry.

Yankuba

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #7 on: February 12, 2015, 05:53:25 PM »
I vote for the guaranteed return (paying off debt) but you can always split the difference and do a little of both.

Retired To Win

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #8 on: February 12, 2015, 06:44:46 PM »
The OP did not clarify whether there's PMI on that mortgage.  If there is, I would counsel throwing available excess cash at the mortgage at least until the principal owed has been reduced enough to eliminate the PMI monthly premium.  Then reevaluate options.

fragglebock

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #9 on: February 12, 2015, 06:51:01 PM »
Why so much in savings? Shit or get off the pot, man!

27 is very, very young. If I was 27, with $60K in cash I would put a good chunk of it to use. Invest while time is on your side!

If you feel like the mortgage is a ball and chain, think about a cash-in refinance. You've got a $950 mortgage payment and 4.5% interest. Imagine having a $550 mortgage at 2.8%.

If you're paying PMI, get the hell out of it pronto!

drawn

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #10 on: February 12, 2015, 10:09:36 PM »
Thanks for the advice everyone. I'm a young buck so a lot of this stuff is new to me. So if I invest more, would I be able to retire sooner? Looks like I will definitely need to be investing more of my cash.

Before I found out about this site, my goal was to pay off my mortgage within the next 5 years, which would put me in a position to go from my [current] $20k annual spending - to just $12k! Living off of 12k sounds great to me since the mortgage would be paid in full.  From there, I would be able to focus primarily on investing and saving the majority of my income, leading me right into early retirement. I was thinking the whole process would take me a little over 10-12 years to achieve. Not sure if this is the best route for my situation though. I feel like such a newbie, haha.

The OP did not clarify whether there's PMI on that mortgage.  If there is, I would counsel throwing available excess cash at the mortgage at least until the principal owed has been reduced enough to eliminate the PMI monthly premium.  Then reevaluate options.

Thankfully, there is no PMI on my mortgage.

Vilgan

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #11 on: February 12, 2015, 11:34:55 PM »
Tax sheltered space is use or lose. So dumping a bunch into a mortgage now and then planning to invest/save a ton down the road can backfire since you will likely max out your 401k/roth IRA space and have to save in taxable.

A general approach might be:

1) If you get a match in your 401k, make sure to get that match before you do anything else
2) Look at refinancing the house into a lower rate. 4.5 is really high. Consider a 5/1 ARM or 15 year fixed.
3) Max out Roth IRA
4) Max out 401k (probably Roth 401k in your tax bracket)
5) Max out HSA
6) If you have any ability to save left (unlikely on that income), dump it into the mortgage.

I'm a few years down the road from you and I wish I could go back in time and spend more time maxing out my IRA/401k rather than paying down debt. Now I have lots of money to save but the same 401k/Roth IRA limits.

joat

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Re: Reader Case Study: Investing vs paying off mortgage
« Reply #12 on: February 13, 2015, 11:14:24 AM »
Arguing over paying off a mortgage early versus investing is, in my opinion, pointless. It's a personal decision similar to choosing early retirement and one that will not affect a Mustachian.
  • Your savings rate is more important.
    http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
    "Well, I have a surprise for you. It turns out that when it boils right down to it, your time to reach retirement depends on only one factor: Your savings rate, as a percentage of your take-home pay."
    Granted, MMM states one of the assumptions is that "You can earn 5% investment returns after inflation during your saving years." So yes, people must invest some of their money - at the very least matching 401k (if available) and maximizing Roth IRA contributions and ideally maximizing all available tax-advantaged accounts (the OP has stated his employer doesn't have a 401k so that leaves quite a bit of extra income). After that, it's ok to pay off your mortgage early if you want to. Ideally one should still invest some money in taxable investments but find a balance that you feel comfortable with. The point is that as long as your savings rate is high and you're investing some of your savings you'll be fine. Just don't let your money sit in a checking/savings account.

    Yes, you can make more money by investing it versus paying off your mortgage; however you can also make less if the market has low/negative returns. Unless you can predict the future, there's no way to know. Mustachianism is not about making large returns off of your investments to become extremely rich in order to retire early. It's about living a simpler lifestyle and reducing unnecessary spending in order to maximize happiness. You don't even need to retire early if your job makes you happy. I argue that the difference in returns between the two isn't a big deal for a Mustachian. Investment returns are a form of income so trying to increase returns is a form of increasing your income. To quote MMM once again:
    "The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect: it increases the amount of money you have left over to save each month and it permanently decreases the amount youíll need every month for the rest of your life"

  • A Mustachian will almost certainly have more money than they need to live on regardless of whether they pay off their mortgage early or invest the money. One argument I frequently see is "Why would you pay off your mortgage early when you could invest it and have more money?" The exact same argument could be made about retiring early: "Why would you retire early when you could keep working and make more money?" Let's generalize this to "Why would you do A when you could have more money if you do B?" There is a simple answer to this question: because doing A would make me happier than having more money. I think that focusing too much on building up large amounts money is an easy trap to fall into; building up large sums of money is a side-effect of living a Mustachian lifestyle - not the point. One of the main ideas of this blog is that after a certain point, money doesn't make you happier and that in fact, it requires very little money to be happy. If you follow a Mustachian lifestyle, there is no impact on your happiness having $500,000 in the bank versus having $1,000,000 in the bank. So if paying off your mortgage earlier would make you happier, go for it as long as you still invest. Either way, you'll still be able to focus on maximizing your happiness and quite able to retire early.

    http://www.mrmoneymustache.com/2014/11/23/not-extreme-frugality/
    • "Itís about using logic and science to design a Slightly Less Ridiculous Than Average Lifestyle in order to live more happily."
    • "But itís not about the money, and as long as you think it is about the money, youíre still fucked."
    • "The choices are no longer based on saving money, but rather on doing our best to live a good life."

So please, when someone asks for advice about paying off a mortgage early, let's encourage them to: increase their savings rate, maximize tax-advantaged investments and after that feel free to pay off their mortgage early if that makes them happier. After all, happiness is what Mustachianism is all about.