Savings question for my brother

[Mattzlaff]

Preamble: My brother is doing pretty well for himself, he doesn't follow any real MMM advice yet has just turned to me with some questions. He knows I've been doing a lot of reading, I have followed the MMM blog for a long time and the forum I have lurked for a bit too, I don't do much posting but I have read quite a bit.

He doesn't "buy in" to the MMM philosophy he thinks it's crazy. However the investment strategies and the money talk is something he can get behind. He buys new, he had more debt than he does now and I think for someone who lives where and how he does he has managed his money fairly well. We don't talk money in direct dollars, it's a competitive thing with him so I have not asked lump sum amounts which may make this post a bit harder. The number 1 thing lied about is money. It's not fair for him to ask for advice and not give me dollar amounts but hell that's why I ask here for advice!

So I'll get on with it.

It's tax season here in Canada and he asked me a simple question about what to do with his savings that he holds in cash. He has room in his RRSP to put all of it however, he owns a mortgage in a HCOL area at 2.5%, and he owns a car loan at 1.5%. He says this cash he has will pay down 95%ish of his car loan if he chooses to put it there.

Now the mustachian in me instantly wants him to invest it, even at 4% interest on his loans in total he will/should do better on the market if he follows ETF advice from Canadian couch potato/myself/MMM/Mr frugal toque. His current portfolios do not follow Mustachian advice however he's not stock picking or market timing so he's not making me throw up while I listen to his "retirement plan picks"

So if we're not paying down the car loan then he should either invest, or put it on the mortgage and that's really up to him on how he feels to be done paying a mortgage/car loan over reinvestment of dividends and compounding interest. This is what I told him.

HOWEVER!

The mortgage, he claims that 399.96$ biweekly is paid by the company he works for towards his interest on his mortgage, incentive to live where he lives, It's the oil town here, and if anyone from this board is from Canada they will guess right with the Ft. Mac. But being an oil town in an oil downturn is giving him some sanity issues with his mortgage and his job teetering on the balance. I think he will be fine but who knows!

Now to me 800$ a month towards interest seems pretty dang good and he should take any money he has left over and instantly put it into savings, but I want to know how this 800$ towards interest only should be looked at. It's a diminishing amount after 3 or 4 more years of this 800$ it declines to a lower value that he didn't know right away.

Does this 800$ allow him to beat the 7% overall market gain if he puts his savings towards his mortgage? I'm not sure what happens when the 800$ finally covers or exceeds his monthly interest amount.

Since he's getting half his interest paid, if not all of it how does this change where he should invest?

What questions should I ask him to help ease the suffering many of you are going through reading this post?

It's a little confusing especially with out a case study like set of numbers and I hope someone here has heard of a situation like this and can help my thinking out. But If I'm right, he should still pay his mortgage at the usual rate, take left over cash and put it into tax advantaged accounts and stay the course, like many of us do. His situation to me, seems like most of his mortgage payment that he makes is towards the principle, fast tracking his mortgage so he should be in reality saving more and in Mustachian world pumping it into retirement funds.


Post amble?

The housing market where he lives is ridiculously expensive. I think it's ridiculously expensive where I live and my house cost 30-40% less than his. My house was 390k. To give you an idea.

Thanks in advance, He's driving down on the weekend and I will take any questions I read here before I meet with him and ask him, so don't be shy!

[PJ]

Hi Mattzlaff, really good of you to be trying to help your brother figure this out.

I'm not sure that I know the answer to your question, but I thought I'd bump the thread back up to the top of the page for wiser minds than mine to see as they come in from their work day or whatever their retired selves have been doing today!

[Lumberjack]

In the spirit that no bump is a bad bump...

This $800 is interesting. Is he certain that it's the company's direction to pay this biweekly against the interest portion of his mortgage? That seems really complex and biased towards homeowners. Also, incentivizing a more expensive home purchase. I'd wonder if this was just how it was explained to him or how he internalized the understanding of the policy. If it's a straight up housing allowance or COL adjustment for the overheated market, then maybe he doesn't stand to lose anything by accelerating the mortgage payoff.

I'd also assume that's a taxable benefit? Does he know if he's paying tax on that amount?

You've said the cash he has in hand can 95% pay off his car loan. You've also said his mortgage interest each month is ~$1600 (since the $800 being paid is half), and the rate is 2.5%. This, to me, suggests that if the company benefit is a flat amount, unless his car is worth a TON there is no way that putting that money on the mortgage is going to reduce the interest portion below $800 per month. And if that is true, then I don't think it needs to factor into the calculus (since regardless of where he allocates that money, he won't lose that benefit).

If that's all accurate, then I think it's back to your original question and what best suits his needs. Most Mustachians would agree with you that, mathematically, investing is the clear winner if you're in it for the long term.

[Mattzlaff]

I may have misstated, the biweekly sum paid to interest by his company is $399 and change according to him therefore 800$ every month, when he told me it goes on his interest I directly asked him if it's interest only and he seemed 100% sure.

I'll also fill in that even though I'm not entirely sure on how much he spent on his house, I would guess he didn't have a full 20% down, as a "new" home owner where I live I believe that 5% is all one needs, and the house value at the time of purchase would be between 500-650k.

I'll try to get more details out of him when I see him this weekend. He only comes down a little bit because he's 5 hours away.