Author Topic: Mortgage Payoff / Emergency Fund Brokerage Account  (Read 5233 times)

jnw

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Mortgage Payoff / Emergency Fund Brokerage Account
« on: March 12, 2022, 09:39:28 PM »
I have like $10k in cash assets just sitting in the bank gaining like 0.5% interest, which of course is pathetic considering how high inflation is.  I've also been paying an extra $1200 per month lately on top of minimum mortage payment to fast pay the mortgage.

I have a plan now, which I'd like to share, which I think might be good for me.  I owe $41k on my mortage, so if I paid it off each month with an excess payment of say $1200, it'd be paid off in about 2.5 years.   This is what I *was* planning to do.

However, since the recent market downturn, as well as high CAPE ratio, now I am thinking I'l use a dedicated brokerage account (TD Ameritrade personal investment account) as a "Mortgage Payoff / Emergency Fund Account".

I'll deposit the $10k I have in savings into this brokerage account.  I will also deposit $1200 per month into it instead of paying principle down, just paying the minimum $541 house payment (mortage/prop tax/insurance).

I won't buy into VTI immediately with that $10k nor will I immediately automatically buy VTI with the $1200 deposited each month.

What I'll do instead is setup a long series of "limit buy orders" of VTI.  Every dollar VTI drops another buy order will be executed.. say from $211 -- currently market is $212 -- down to $130.

Most likely these buy orders will not execute and frankly I don't care because it's an emergency fund predominantly.   But if tehre is a crash or recession and they do execute, it will be a lot of VTI purchased at bargain prices dollar cost averaging me down.

So there are a few advantages to doing this.  You'll have either access to a very large cash emergency fund and/or a long series of VTI stock purchased at bargain prices.  Also another advantage is you have access to this money up until the mortage is paid off.. you don't lose access to the cash as you would if you just paid down the principle on the loan.

Worst case scenario for me would be the market starts shooting back up monday, and keeps going up,  and no VTI is ever purchased in that account.   I would then be paying 4.63% interest (my fixed mortgage interest rate) on that money until I save enough to pay off the mortgage.   But in my case this isn't too bad because I only owe $41k and it will take only 2.5 years to pay off... but if it takes 2.75 years instead because I paid $2k more in mortgage interest then so be it.  I think the $2k loss risk is small compared to the potential profits I could make if there is a recession for a year then a bounce a back.

I am bearish right  now I admit. I realize current prices are a relative bargain but the CAPE (Shiller PE ratio) is still relaly high.


« Last Edit: March 12, 2022, 09:45:45 PM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #1 on: March 12, 2022, 09:44:46 PM »
Or could put half each month to directly buying VTI and the other half dollar cost averaged down limit buy orders on VTI.  Also for the initial deposit into brokerage account, perhaps buy $5k of VTI now and the other $5k dollar cost averaged down.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #2 on: March 12, 2022, 09:52:34 PM »
My max loss would be 4.63%.  But potential gain could be very huge.

I realize the market could go down further than my average cost (and I could temporarily lose more than 4.63% if I sold) but I would never sell it and to be honest be happier because I could then buy more at a discount.

I don't have much in retirement at all, so this is different point of view from many here.  I am just starting, so for me the market going down would be a good thing for me.  Not trying to offend anyne just sharing my position.
« Last Edit: March 12, 2022, 09:54:51 PM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #3 on: March 12, 2022, 09:59:08 PM »
Finally when this account gets large enough, larger than what I owe on mortage, then I could pay off the mortage from this account.  Preferably after the market has risen back up again from a hypothetical downturn (where I bought up bargains).

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #4 on: March 12, 2022, 10:26:27 PM »
It's pretty pathetic when I think about it.

1) High CAPE, way surpassing Black Tuesday and approaching Dot.com bubble levels.
2) Highest inflation in 40 years
3) Fed going to hike interest rates
4) Word instability w/ Russian Invasion
5) Increasing gas prices
6) Supply Chain Issues  (chip shortage etc.. and China siding with Russia probably won't help)
7) Real Estate Bubble
8) Coming out of a pandemic
9) Capital Insurrection and Election Conspiracy Theories
10) Racial tensions and LGBTQ+ Phobia.

What fricking gives? My goodness.   Didn't really have to deal with most of that for about a decade, since 2009.

I really don't see how we can avoid a recession but I'm a newb.  We are already in a correction and close to a recession right?   Mabye I'm being too pessimistic.
« Last Edit: March 13, 2022, 01:30:08 AM by JenniferW »

vand

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #5 on: March 12, 2022, 11:58:52 PM »
As often the case, people think backwards and do the opposite of what is most beneficial in the long term.

By aggressively paying off your mortgage you are actually giving up one of the best inflation hedges available to you. Inflation is you best friend when it comes to reducing debt.

Instead of paying off the mortgage if you are worried about inflation, a much better option would be to diversify your risk and further increase your inflation hedge by using your EF to invest in a solar PV system for your home.
« Last Edit: March 13, 2022, 12:03:51 AM by vand »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #6 on: March 13, 2022, 12:35:28 AM »
JenniferW - Many people like paying off their mortgages rather than earning every last cent on their money.  Moving money from savings (+0.5%) to paying down your mortgage (-4.63%) automatically earns you 4.13% - you have more money because the interest payments on that amount are gone.  Further, if you already planned to do that, I'd stick with it.  The pain of this investment plan not working out is probably greater than the joy of seeing it work.

Goldman Sacs estimates a 20%-30% chance of recession in the next couple years.  Which leaves a 70-80% chance of avoiding a recession.  I expect that my information isn't as good as Goldman Sacs, so I would rely on the probabilities they calculated.  So I would favor 70% odds and buy sooner rather than try for a 30% chance that waiting is better.
https://www.investopedia.com/war-boosting-recession-odds-for-2023-goldman-sachs-says-5221954

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #7 on: March 13, 2022, 01:18:05 AM »
As often the case, people think backwards and do the opposite of what is most beneficial in the long term.

By aggressively paying off your mortgage you are actually giving up one of the best inflation hedges available to you. Inflation is you best friend when it comes to reducing debt.

Instead of paying off the mortgage if you are worried about inflation, a much better option would be to diversify your risk and further increase your inflation hedge by using your EF to invest in a solar PV system for your home.

I'm older at 51.  I don't know if I will live another 10 or 25 years.  So I have to be careful.  I want there to be money for my heir if I die, so he can more easily afford utilities, groceries, property tax and homeowner's insurance.

Yeah it seems like solar panels for home would be a great investment because of the rising energy costs and the fact that the thing will proably pay for itself in 6 years.   I figure it'd cost me around $10k for DIY .. 20 panels fo around 350w each.. Maybe if I am lucky and buy used 310w panels (or so) for $1000 I can build a system for $7k or less I dunno.

Can you explain the mortgage inflation hedge thing more? I do know that as inflation rises a lot.. I get a corresponding increase in income and fairly quickly the $40k mortgage balance will be a less significant number.
« Last Edit: March 13, 2022, 01:33:33 AM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #8 on: March 13, 2022, 01:21:26 AM »
JenniferW - Many people like paying off their mortgages rather than earning every last cent on their money.  Moving money from savings (+0.5%) to paying down your mortgage (-4.63%) automatically earns you 4.13% - you have more money because the interest payments on that amount are gone.  Further, if you already planned to do that, I'd stick with it.  The pain of this investment plan not working out is probably greater than the joy of seeing it work.

Goldman Sacs estimates a 20%-30% chance of recession in the next couple years.  Which leaves a 70-80% chance of avoiding a recession.  I expect that my information isn't as good as Goldman Sacs, so I would rely on the probabilities they calculated.  So I would favor 70% odds and buy sooner rather than try for a 30% chance that waiting is better.
https://www.investopedia.com/war-boosting-recession-odds-for-2023-goldman-sachs-says-5221954

Thanks for your advice. I know where you are coming from. It's a guaranteed 4% return.
« Last Edit: March 13, 2022, 01:35:45 AM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #9 on: March 13, 2022, 08:30:35 AM »
@JenniferW For what it's worth, I like the "payoff your mortgage" idea.

Three reasons:
1. At your age, you're probably investing or should be investing something into bonds. And in effect you can do that and get a GREAT return by paying down your mortgage. Sounds like you'll earn 4.63% that way. In comparison, I think I'm earning 1.5% on the treasuries I'm buying, which probably have similar risk as your mortgage in a sense. So to summarize, a good return on bonds.
2. Probably pretty tax efficient. In effect, that 4.63% return is an after-tax return. Which means saving 4.63% is better than earning 6% taxable...
3. There's a convenience and simplicity angle here too. You'll find it pretty nice to not have to make that monthly payment. To not have to wait for the annual mortgage statement to do your taxes. Etc.

vand

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #10 on: March 13, 2022, 10:32:16 AM »
As often the case, people think backwards and do the opposite of what is most beneficial in the long term.

By aggressively paying off your mortgage you are actually giving up one of the best inflation hedges available to you. Inflation is you best friend when it comes to reducing debt.

Instead of paying off the mortgage if you are worried about inflation, a much better option would be to diversify your risk and further increase your inflation hedge by using your EF to invest in a solar PV system for your home.

I'm older at 51.  I don't know if I will live another 10 or 25 years.  So I have to be careful.  I want there to be money for my heir if I die, so he can more easily afford utilities, groceries, property tax and homeowner's insurance.

Yeah it seems like solar panels for home would be a great investment because of the rising energy costs and the fact that the thing will proably pay for itself in 6 years.   I figure it'd cost me around $10k for DIY .. 20 panels fo around 350w each.. Maybe if I am lucky and buy used 310w panels (or so) for $1000 I can build a system for $7k or less I dunno.

Can you explain the mortgage inflation hedge thing more? I do know that as inflation rises a lot.. I get a corresponding increase in income and fairly quickly the $40k mortgage balance will be a less significant number.

Nobody knows how much longer they have on this mortal coil, so you're in the same boat as the rest of us on that front, I'm afraid.

Inflation helps debt holders, especially holders of fixed rate debt, because over time it erodes the real value of the debt.  That is why you have people who held mortgages through the 1970s and 80s come out the side with tiny mortgages as everything else went up.

And while it's true that there can be a squeeze in living standards during inflationary times which is what frightens mortgage holders, in general over long enough time wages will eventually catch up.

Mortgage rates today are deeply negative in real terms - actually, as negative as we have ever seen. That means your debt is being shrunk relative to everything else, including (eventually) wages and income, just by the act of everything else going up in price.

Holding a mortgage is one of the only practical means of shorting your own currency against its inevitable future depreciation. Don't be in a great hurry to give up that hedge, no matter how fuzzy inside having a paid off home may feel.

I have posted this article many times in the past, as I feel its the best such article I have ever read that explains all the pros and cons of paying off your mortgage:
https://financialmentor.com/investment-advice/pay-off-mortgage-early-or-invest/7478 - it is not a particularly new article (I think it's 10 years old), so pay great attention to when he starts talking about a mortgage being a hedge against inflationary monetary policy, and how potnential negative real borrowing rates mean that you are effectively being paid to borrow the money.  Both these possibilities are now very much where we are today.

« Last Edit: March 13, 2022, 10:41:04 AM by vand »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #11 on: March 13, 2022, 10:51:12 AM »
Inflation helps debt holders, especially holders of fixed rate debt, because over time it erodes the real value of the debt.  That is why you have people who held mortgages through the 1970s and 80s come out the side with tiny mortgages as everything else went up.

And while it's true that there can be a squeeze in living standards during inflationary times which is what frightens mortgage holders, in general over long enough time wages will eventually catch up.

Mortgage rates today are deeply negative in real terms - actually, as negative as we have ever seen. That means your debt is being shrunk relative to everything else, including (eventually) wages and income, just by the act of everything else going up in price.

Holding a mortgage is one of the only practical means of shorting your own currency against its inevitable future depreciation. Don't be in a great hurry to give up that hedge, no matter how fuzzy inside having a paid off home may feel.

I have posted this article many times in the past, as I feel its the best such article I have ever read that explains all the pros and cons of paying off your mortgage:
https://financialmentor.com/investment-advice/pay-off-mortgage-early-or-invest/7478 - it is not a particularly new article (I think it's 10 years old), so pay great attention to when he starts talking about a mortgage being a hedge against inflationary monetary policy, and how potnential negative real borrowing rates mean that you are effectively being paid to borrow the money.  Both these possibilities are now very much where we are today.

So is this why homes have soared in price? A bunch of rich investors knew this and started buying up real estate at very lower interest, not concerned about price because they knew there would be an inflation explosion soon, of 7+ percent per year?  7% last year.. looking like 8% this year.  Eventualy at that rate, the home becomes almost very cheap.  While at same time knowing all the real estate buying in the short term would push up the price and allow them to get some gains as well if they sold.
« Last Edit: March 13, 2022, 10:56:19 AM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #12 on: March 13, 2022, 11:33:36 AM »
Are there brokerages which would give me some interest on the cash sitting there in the account? Say tens of thousands, with queued up limit buy orders.  The cash is just sitting there and the orders might not ever execute; it would be nice to at least get some interest on all that cash.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #13 on: March 13, 2022, 12:27:12 PM »
EMERGENCY FUND

I just think this is a great idea.  Say you have a $20k emergency fund.  And you like to keep it in cash just because you are afraid of the market and just needs to be there when you need it.  Instead of it just sitting in your bank account at 0.25% to 0.5%, put it in brokerage account and set up a bunch of GTC (good until canceled) limit buy orders.. dollar cost averaged down to buy up bargains as they come.    The lower the market goes the more bargains you buy, yay!  But if it goes up instead, you still have your $20k emergency fund in cash sitting there.

Here is a screenshot of my TD Ameritrade investment account with a sequence of VTI buy limit orders (GTC+EXT) set to trigger at various price levels.  As I add more into my cash account each month I'll add more buy limit orders at smaller increments.. like $1 instead of the current $5.

Trade commissions are $0 these days.

What's nice about this since the orders are good till cancelled, your strategy plan is there and automatically executes. No emotion plays in. It just executes.  If stock market prices do keep dropping, to me it makes sense to use emergency funds to buy the bargains.   Eventually the market will reach a low point and you'll still have limit buy orders under that which will never get executed and you can cancel those limit orders if you do need to access the cash for an emergency.

« Last Edit: March 13, 2022, 12:42:07 PM by JenniferW »

vand

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #14 on: March 13, 2022, 12:52:28 PM »
Inflation helps debt holders, especially holders of fixed rate debt, because over time it erodes the real value of the debt.  That is why you have people who held mortgages through the 1970s and 80s come out the side with tiny mortgages as everything else went up.

And while it's true that there can be a squeeze in living standards during inflationary times which is what frightens mortgage holders, in general over long enough time wages will eventually catch up.

Mortgage rates today are deeply negative in real terms - actually, as negative as we have ever seen. That means your debt is being shrunk relative to everything else, including (eventually) wages and income, just by the act of everything else going up in price.

Holding a mortgage is one of the only practical means of shorting your own currency against its inevitable future depreciation. Don't be in a great hurry to give up that hedge, no matter how fuzzy inside having a paid off home may feel.

I have posted this article many times in the past, as I feel its the best such article I have ever read that explains all the pros and cons of paying off your mortgage:
https://financialmentor.com/investment-advice/pay-off-mortgage-early-or-invest/7478 - it is not a particularly new article (I think it's 10 years old), so pay great attention to when he starts talking about a mortgage being a hedge against inflationary monetary policy, and how potnential negative real borrowing rates mean that you are effectively being paid to borrow the money.  Both these possibilities are now very much where we are today.

So is this why homes have soared in price? A bunch of rich investors knew this and started buying up real estate at very lower interest, not concerned about price because they knew there would be an inflation explosion soon, of 7+ percent per year?  7% last year.. looking like 8% this year.  Eventualy at that rate, the home becomes almost very cheap.  While at same time knowing all the real estate buying in the short term would push up the price and allow them to get some gains as well if they sold.

Sure. Rich investors, poor investors, home owners, not-home owners.   It shouldn't be a surprise to anyone that when people are incentivized to do certain things by subsidy or taxation they do more of what is subsidized and less of what is not subsidized.  Everyone and his dog has been on a buying frenzy of everything from houses to NFTs.

You can think of the recent buying of real estate, stocks and other risky assets as action that has been heavily encouraged by a subsidy of by super loose monetary policy that has pushed financing costs to record lows. People were effective being paid to borrow money to buy up these assets.

But rather than raise the money for the subsidy directly through taxation and taking away people's purchasing power that way by leaving them with less dollars to spend, they simply created it through monetary expansion which took away their purchasing power through inflation instead, so society as a whole is ends up paying for it.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #15 on: March 13, 2022, 04:22:32 PM »
I really don't see how we can avoid a recession but I'm a newb.  We are already in a correction and close to a recession right?   Mabye I'm being too pessimistic.

Times appear to be troubled, but they kind of always are.  To quote Aldo Rain, Business is a boomin'!  Let's see...(quickly consults Google...)  Real GDP was up at a 7% annualized rate last quarter.  Last year the economy added over six million jobs.   That's double the previous record.  The economy is on fire.  There is nothing, repeat nothing, that says we're close to a recession. 

vand

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #16 on: March 14, 2022, 08:41:59 AM »
EMERGENCY FUND

I just think this is a great idea.  Say you have a $20k emergency fund.  And you like to keep it in cash just because you are afraid of the market and just needs to be there when you need it.  Instead of it just sitting in your bank account at 0.25% to 0.5%, put it in brokerage account and set up a bunch of GTC (good until canceled) limit buy orders.. dollar cost averaged down to buy up bargains as they come.    The lower the market goes the more bargains you buy, yay!  But if it goes up instead, you still have your $20k emergency fund in cash sitting there.

Here is a screenshot of my TD Ameritrade investment account with a sequence of VTI buy limit orders (GTC+EXT) set to trigger at various price levels.  As I add more into my cash account each month I'll add more buy limit orders at smaller increments.. like $1 instead of the current $5.

Trade commissions are $0 these days.

What's nice about this since the orders are good till cancelled, your strategy plan is there and automatically executes. No emotion plays in. It just executes.  If stock market prices do keep dropping, to me it makes sense to use emergency funds to buy the bargains.   Eventually the market will reach a low point and you'll still have limit buy orders under that which will never get executed and you can cancel those limit orders if you do need to access the cash for an emergency.



Yeah.. just don't do that.
Either it's a money earmarked for investing for earmarked to  be there in the event of an emergency. Don't obfuscate the two.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #17 on: March 14, 2022, 12:54:42 PM »
Yeah.. just don't do that.
Either it's a money earmarked for investing for earmarked to  be there in the event of an emergency. Don't obfuscate the two.

I'll still have the emergency funds in cash if the limit orders aren't achieved. If they are achieved then fabulous becuase I got them at ridiculous discounts.  If I had to sell later at a loss, it will be  a small loss beause they were purchased at a heavy discount. I think it's actually a brilliant plan.  The plan is much more conservative than the "put all your emergency fund into VTI at its current price" which a lot of people do here.
« Last Edit: March 14, 2022, 12:57:58 PM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #18 on: March 14, 2022, 02:45:40 PM »
Yeah.. just don't do that.
Either it's a money earmarked for investing for earmarked to  be there in the event of an emergency. Don't obfuscate the two.

I'll still have the emergency funds in cash if the limit orders aren't achieved. If they are achieved then fabulous becuase I got them at ridiculous discounts.  If I had to sell later at a loss, it will be  a small loss beause they were purchased at a heavy discount. I think it's actually a brilliant plan.  The plan is much more conservative than the "put all your emergency fund into VTI at its current price" which a lot of people do here.

Sounds like you got it all figured out

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #19 on: March 14, 2022, 02:58:01 PM »
Sounds like you got it all figured out

Nah, I appreciate the input here.  I posted it here because I'd like to learn about any potential flaws to plan :)  I sometimes think I know what I am doing but change my mind after people point out flaws or things I didn't think about.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #20 on: March 14, 2022, 04:27:26 PM »
I think Vand makes a good point. Your plan needs more thought. Emergency Fund needs & Huge Market Downturn are highly correlated events. Mixing them up like this isn't good. I would consider this money your considering investments.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #21 on: March 14, 2022, 06:16:51 PM »
I think Vand makes a good point. Your plan needs more thought. Emergency Fund needs & Huge Market Downturn are highly correlated events. Mixing them up like this isn't good. I would consider this money your considering investments.

Thing is my emergency fund will last me a year right now in cash; it's pretty big.  And if I spread the limit buys all the way down to say a limit buy at $120 for VTI,  that means the market would have dropped 50% which I doubt would happen.   And if it did and if there was an emergency for me, then I would just sell at a small loss because my dollar cost average for the emergency fund buys would be relatively low.

It's unlikely I'd have an emergency correlated to stock market drop because my income is social security, which has been really reliable.   To be honest, I am actually technically currently financially independent because my only income is social security and I save about half of that income each month.   I guess my real emergency is if social security failed.. but if it fails then millions of elderly/disabled people will suffer as well which probably won't happen.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #22 on: March 14, 2022, 06:23:27 PM »
@JenniferW For what it's worth, I like the "payoff your mortgage" idea.

Three reasons:
1. At your age, you're probably investing or should be investing something into bonds. And in effect you can do that and get a GREAT return by paying down your mortgage. Sounds like you'll earn 4.63% that way. In comparison, I think I'm earning 1.5% on the treasuries I'm buying, which probably have similar risk as your mortgage in a sense. So to summarize, a good return on bonds.
2. Probably pretty tax efficient. In effect, that 4.63% return is an after-tax return. Which means saving 4.63% is better than earning 6% taxable...
3. There's a convenience and simplicity angle here too. You'll find it pretty nice to not have to make that monthly payment. To not have to wait for the annual mortgage statement to do your taxes. Etc.

Thanks for pointing all that out.. You're right nice tax efficiency and simple.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #23 on: March 14, 2022, 07:28:32 PM »


The $210 limit buy order executed automatically today, it bought one share.  So $210 less in emergency fund but a stock at a discounted price.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #24 on: March 15, 2022, 06:46:26 AM »
I guess this is sort of a hybrid mortgage payoff sinking fund, investment account & emergency fund.  I will dollar cost average down enough on the limit buy orders so that a reasonable amount of orders won't even possibly execute.   Or if things just crash too far, I could always cancel the limit orders to hold onto some of the cash.. towards the bottom of the sequence.

Lol the "sinking" fund has a double meaning in this case.. a sinking fund taking advantage of any sinking stock prices.  A sinking sinking fund.
« Last Edit: March 15, 2022, 06:50:13 AM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #25 on: March 15, 2022, 08:07:36 AM »

The $210 limit buy order executed automatically today, it bought one share.  So $210 less in emergency fund but a stock at a discounted price.

Love when people talk about stocks at "discount" or "bargain", as if they're buying shoes or TVs on sale. A relatively fixed cost that's temporarily reduced. The price of stocks constantly fluctuate, as is largely based on what others will pay for it; there's no "discount". The price of stocks is what it is now, that's the value. It can change in the future, but nobody knows in which direction.

There's no "discount" if it keeps dropping. What happens if you're automatically plowing your emergency fund into VTI at 30% drop, and there's a 50% drop? You're then underwater, and would have been better of dumping it all in at -50% (not that that's a great idea either, but at least potentially more profitable).

And then after your whole emergency fund has been invested, what if you have an emergency? Even unrelated to your work or stock market; Your roof breaks, you car breaks down, furnace dies? Do you then sell stocks at the bottom? And don't say "I'd borrow from my HELOC". Then the HELOC is your EF, not the cash that's being invested. This strat has nothing to do with emergency fund, it's an attempt to DCA downward. And since the market goes up more than it goes down, then this cash should just be invested right now anyway

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #26 on: March 15, 2022, 08:49:59 AM »

The $210 limit buy order executed automatically today, it bought one share.  So $210 less in emergency fund but a stock at a discounted price.

Love when people talk about stocks at "discount" or "bargain", as if they're buying shoes or TVs on sale. A relatively fixed cost that's temporarily reduced. The price of stocks constantly fluctuate, as is largely based on what others will pay for it; there's no "discount". The price of stocks is what it is now, that's the value. It can change in the future, but nobody knows in which direction.

There's no "discount" if it keeps dropping. What happens if you're automatically plowing your emergency fund into VTI at 30% drop, and there's a 50% drop? You're then underwater, and would have been better of dumping it all in at -50% (not that that's a great idea either, but at least potentially more profitable).

And then after your whole emergency fund has been invested, what if you have an emergency? Even unrelated to your work or stock market; Your roof breaks, you car breaks down, furnace dies? Do you then sell stocks at the bottom? And don't say "I'd borrow from my HELOC". Then the HELOC is your EF, not the cash that's being invested. This strat has nothing to do with emergency fund, it's an attempt to DCA downward. And since the market goes up more than it goes down, then this cash should just be invested right now anyway

If VTI is gonna go up then it IS a cash emergency fund and mortgage sinking fund.   It's only an investment if the market goes down and the portion of the investment is how fall it falls down, and would a great time to invest.   The best time.. Ask Warren Buffet, he holds  a lot of cash reserves for this case.  And I think he's used the word "bargains" for purchasing stocks. Like I said I am gonna dollar cost average down really far.. the market won't get as low as I will average it down.  I'll always have some at the bottom for cash emergency.  And I can always cancel the bottom orders if I feel uncomfortable.
« Last Edit: March 15, 2022, 08:59:36 AM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #27 on: March 15, 2022, 08:56:01 AM »
If the market tumbles, I will be ecstatic to be honest.  Will be happy every time I am emailed and notified another limit buy has executed.  This account will eventually have up to $48k in it or so.  $41k is my mortgage payoff and $7k is my emergency fund.  If the market goes down them my average cost is way down and I'll just take longer to pay off mortgage.    At any time my account is around $45k or so I can just pay off mortage in one payment.  Actualy it will be a bit less by then as I still have to pay min mortgage payment each month.
« Last Edit: March 15, 2022, 08:57:53 AM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #28 on: March 15, 2022, 09:08:40 AM »

The $210 limit buy order executed automatically today, it bought one share.  So $210 less in emergency fund but a stock at a discounted price.

Love when people talk about stocks at "discount" or "bargain", as if they're buying shoes or TVs on sale. A relatively fixed cost that's temporarily reduced. The price of stocks constantly fluctuate, as is largely based on what others will pay for it; there's no "discount". The price of stocks is what it is now, that's the value. It can change in the future, but nobody knows in which direction.

There's no "discount" if it keeps dropping. What happens if you're automatically plowing your emergency fund into VTI at 30% drop, and there's a 50% drop? You're then underwater, and would have been better of dumping it all in at -50% (not that that's a great idea either, but at least potentially more profitable).

And then after your whole emergency fund has been invested, what if you have an emergency? Even unrelated to your work or stock market; Your roof breaks, you car breaks down, furnace dies? Do you then sell stocks at the bottom? And don't say "I'd borrow from my HELOC". Then the HELOC is your EF, not the cash that's being invested. This strat has nothing to do with emergency fund, it's an attempt to DCA downward. And since the market goes up more than it goes down, then this cash should just be invested right now anyway

If VTI is gonna go up then it IS a cash emergency fund and mortgage sinking fund.   It's only an investment if the market goes down and the portion of the investment is how fall it falls down, and would a great time to invest.   The best time.. Ask Warren Buffet, he holds  a lot of cash reserves for this case.  Like I said I am gonna dollar cost average down really far.. the market won't get as low as I will average it down.  I'll always have some at the bottom for cash emergency.  And I can always cancel the bottom orders if I feel uncomfortable.


No. You don't have an emergency fund, you have cash you want to invest. And then the best time to invest (historically) has been yesterday. Hoping for a drop then DCA-ing into that is usually not a good way to invest. I'd also disagree that "the best time to invest" is when the market goes down. Goes down by how much? This would mean you don't invest anything at all most of the time, you'd be sitting in cash for years while the market goes up. I invest us much as I can every two weeks. What Buffest does is irrelevant to pretty much everyone else..

You're basically saying what you "really" need for an emergency is only a portion of your EF, well then that's your EF. You have an EF that's ~twice as big as it needs to and you should just invest it anyway. Anything else is inefficient and loosing to inflation. Just because you have auto-DCA set up doesn't make that any better.
(the "mortgage payoff" part is confusing and makes little sense to me so I'll ignore that. It's just cash, what you'll spend it on is irrelevant)
« Last Edit: March 15, 2022, 09:37:52 AM by Scandium »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #29 on: March 15, 2022, 09:12:24 AM »
Well you are entitled to your opinions.  I don't agree with everything you saying.  I don't think you understand my strategy.  I dont care how long it takes to pay off mortage if it gets tied up. I'd love it if my money gets tied up for a decade at a low average cost.. because that means I'd be buying $1800 more per month in VTi at a great discount compared to current prices.  Eventually it will double or triple again like it has done historically after recessions.

If at some point I get tired of investing at a discount I can just start fast paying the mortgage again.

I want to pay off my mortage if I think the stock market is way too high in a bubble (like I have been doing for the past year).. and I want to put the money instead into stocks if it starts dropping.  I don't feel comfortable at the moment putting all money into VTI at current price because I still feel the CAPE (Shiller PE) ratio is too high and too much instability with inflation, war etc.  I think I want to put about perhaps 1/3rd each month into VTI at current price and dollar cost average the rest down.
« Last Edit: March 15, 2022, 09:21:29 AM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #30 on: March 15, 2022, 09:35:06 AM »
Well you are entitled to your opinions.  I don't agree with everything you saying.  I don't think you understand my strategy.  I dont care how long it takes to pay off mortage if it gets tied up. I'd love it if my money gets tied up for a decade at a low average cost.. because that means I'd be buying $1800 more per month in VTi at a great discount compared to current prices.  Eventually it will double or triple again like it has done historically after recessions.

If at some point I get tired of investing at a discount I can just start fast paying the mortgage again.

I want to pay off my mortage if I think the stock market is way too high in a bubble.. and I want to put the money instead into stocks if it starts dropping.  I don't feel comfortable at the moment putting all money into VTI at current price because I still feel the CAPE (Shiller PE) ratio is too high and too much instability with inflation, war etc.

No you're correct; I don't understand your strategy. In fact the more you explain the more confused I get. The mortgage part especially. That's not an "emergency" so don't see how that enters into it. Just focus on invest vs cash.

Your strategy is basically sitting in ~$45k in cash now. You think there will be a crash, hopefully soon, then DCA in? I think you're making it sound more elaborate than it really is.

You say you'll buy at lower prices, then "Eventually it will double or triple again"? What if it goes up 3x from where it is now? Then you're sitting in cash that could have earned 400%, but instead is loosing to 7% inflation. People have said CAPE is "too high" since about 2011 (on this very forum actually), and the S&P is up over 220% in that time, about 13.6% annually. No having lots of cash isn't the worst, but if we're here to optimize, this is not optimal.

If you can predict when is a bubble, how high it is, how long it will last, when a recession will start, how low it will go, or how long it will last that would be great. But all historical research has found this to not work, and any gaming of guessing tops/bottoms to be suboptimal.
« Last Edit: March 15, 2022, 09:37:11 AM by Scandium »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #31 on: March 15, 2022, 06:02:44 PM »
I don't have 45k now.   I have like $7 and i'd be adding around $1600 per month into this account until I have enough to pay off mortgage. This is a hybrid of Mortage Sinking Fund / Emergency Fund and Investment Account. I've explained it in the various scenarios.   Most likely the stock market will go down in the short term; bull runs don't go up forever. Whatever isn't invested is a cash emergency fund / mortgage sinking fund.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #32 on: March 18, 2022, 01:24:32 PM »
I don't have 45k now.   I have like $7 and i'd be adding around $1600 per month into this account until I have enough to pay off mortgage. This is a hybrid of Mortage Sinking Fund / Emergency Fund and Investment Account. I've explained it in the various scenarios.   Most likely the stock market will go down in the short term; bull runs don't go up forever. Whatever isn't invested is a cash emergency fund / mortgage sinking fund.

Quote
This is a hybrid of Mortage Sinking Fund / Emergency Fund and Investment Account.

There's no such thing. It can't do three things at once. You need to split it into buckets (at least mentally). Your emergency fund is not an investment account, then it's not an emergency fund. (I have little in cash, and tapped my investments for emergencies (car, HVAC) a few times, but at least I'm honest about it..)

I don't know what a "Mortage Sinking Fund" is. You're just saving up to pay off your mortgage? Then it's the same as any savings account for any purchase. It'll be an emergency fund, until you make the purchase, since then it's zero and you no longer have an emergency fund. Is that the plan? Paid off, illiquid home, and zero in the bank? I'd rather have some cash and pay my mortgage slower personally..

Quote
Most likely the stock market will go down in the short term;
this is not guaranteed at all!

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #33 on: March 18, 2022, 01:35:42 PM »
Lol.. why have 40k in cash sitting in bank earning 0.5% when you could have limit order buy setup to at least invest 20k of that into stocks if the market tumbles, buying the stocks at a discount.  It is indeed a hybrid, with the emerency fund portion of the 40k sitting at the very bottom of the queue of limit buy orders which you could ultimately cancel if you got nervous with market getting too low.  Personally I'd let them fill if VTI got down to say a bottom limit of $110 per share.   And I would just save up a  new emergency fund with my ss income.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #34 on: March 18, 2022, 01:40:46 PM »
If VTI did get down to say $110 per share, ultimately triggering all the limit buy orders using my emergency fund portion of the $41k, then as I rebuild the emergency fund the following months with ss income, I'd set more buy limit orders below $110.. the lower it goes the happier I get.  The emergency fund will only start rebuilding and remian untouched when the market starts accelerating back upwards, which it would over time.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #35 on: March 18, 2022, 01:43:30 PM »
If the stocks go down that low then it makes sense to invest in them instead of paying off the mortage with a large portion of this fund.   If the market goes the other way then I'll probably just apply all the saved up cash in this fund to payoff the mortage all at once and be done with it -- leaving a few thousand for emergency fund.  Then build up the emergency fund again.
« Last Edit: March 18, 2022, 01:45:05 PM by JenniferW »

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #36 on: March 18, 2022, 01:47:44 PM »
My order of priority for this account would be the following:

1) get stocks as cheap as possible
2) emergency fund
3) mortgage payoff -- if market doesn't sink and trigger buy orders at discount.

And it would be automatic.  The plan would execute itself.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #37 on: March 20, 2022, 01:24:07 AM »
Let me propose a hypothetical and tie it back to a problem I see.  If someone said they plan to cut their emergency fund in half if they lose their job, what would you think? 
Deep stock market losses are also the time people are more likely to lose their jobs.  Having emergency fund money in the market is a bit like reducing your emergency fund when the risk of unemployment is greatest.

What I'll do instead is setup a long series of "limit buy orders" of VTI.  Every dollar VTI drops another buy order will be executed.. say from $211 -- currently market is $212 -- down to $130.
Pretending that this is idle cash you plan to invest (not an ER), I would say this plan leaves money permanently out of the market.  VTI would need to be -60% from it's 52 week high ($244) for all orders to execute, but that deep a drop has not happened since the great depression.  And if markets go up +50% and then drop -50% ... the net result ($100 -> $150 -> $75) is only a 25% drop.  As the market goes up, these limit orders become less and less likely to execute.

EDIT: Cleaned up some typos.
« Last Edit: March 20, 2022, 10:06:19 AM by MustacheAndaHalf »

Scandium

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #38 on: March 20, 2022, 07:16:44 AM »
Let me propose a hypothetical and tie it back to a problem I see.  If someone said they plan to cut their emergency fund in half if they lose their job, would you think? 
Deep stock market losses are also the time people are more likely to lose their jobs.  Having emergency fund money in the market is a bit like reducing your emergency fund when the risk of unemployment is greatest.

What I'll do instead is setup a long series of "limit buy orders" of VTI.  Every dollar VTI drops another buy order will be executed.. say from $211 -- currently market is $212 -- down to $130.
Pretending that this is idle cash you plan to invest (not an ER), I would say this plan leaves money permanently out of the market.  VTI would need to be -60% from it's 52 week high ($244) for all orders to execute, but that deep a drop has not happened since the great depression.  And if markets go up +50% and then drop -50% ... the net result ($100 -> $150 -> $75) is only a $25 drop.  As the market goes up, these limit orders become less and less likely to execute.
Exactly what I'm thinking too, but it doesn't seem to go through.

When risk of "emergency" is great the fund gets depleted. While time are good, market goes up, and tens of thousands (more than needed for EF) sits idle. Seems like a worst of both worlds to me!

Jennifer; several points of your scenarios you say "rebuild" your EF, what if that's when you have an emergency?

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #39 on: March 20, 2022, 11:16:43 AM »
I can rebuild my 6 month emergency fund, from $0, in four months with my social security income.   Social Security income doesn't go down during a market downturn. 

My emergency fund will most likely be used for things like big home repairs etc.

Additionally the lower the market goes down the less risk for investment.  Because the propensity for it to go back up gets higher the lower the market goes down.   So even if the $7500 of buy orders get executed at the bottom of that $40k account,  the chances are it won't stay that low for long or if it does, it won't go down substantially more. So if for some reason I had to sell I might only take a 10% loss or less.   But again I can rebuild my emergency fund in 4  months.

Many people here will tell you they put all their money in VTI at current market rate and it IS their emergency fund -- Mr. Money Mustache himself comes to mind. This plan of mine is more conservative than that.  This plan will most likely just result in a lot of cash in this account before I just use it to pay off the mortgage.. because the market generally goes up all the time.  On the other hand, I feel the stock market is currently a huge speculative bubble; the CAPE (Shiller PE) Ratio is out of hand and I don't trust putting all my money each month into VTI at current market rate.   Especially with the crazy inflation, overly low interest rates, stock buy backs and world instability.  So I feel safer with this plan.
« Last Edit: March 20, 2022, 11:31:42 AM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #40 on: March 22, 2022, 04:15:10 PM »
So I decided to just go with this plan.  Here is a screenshot of my April 2022 finance worksheet.  To the right side is the current buy orders for March, $3300 available for trading.

I'll be adding $2400 in April for a total of $5700 available for investing.   To the left are the planned buy orders.   I'll stop at around $135 and just increase the qty of shares purchased, evenly over the months.  I just increment the share qty and the spreadsheet calculates it all.

Right now I don't have any VTI purchased in this account, it's all cash.    I'll have other info added to this worksheet including current # of shares invested in, average cost and current gains/losses.  Will also add overall value of the account.


jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #41 on: March 22, 2022, 04:23:38 PM »
I'm leaving $3500 in my checking account at all times.  It's enough for 2 months expenses.   So no matter what I'll have 2 months emergency fund on hand in cash in checking.   I also have like $7500 in discretionary assets I am willing to part with if I need to in an extended emergency.

Once this account gets about $7500 beyond what is needed for a mortgage payoff, I'll asses what to do at that time, which will be around 2.5 to 3 years from now.   If I end up getting  a lot of VTI at great discounts for some reason, like due to a panic sell or a short term crash, it'll mean it will just take longer to pay off the mortgage than 2.5 years.

I realize if the market never goes down in the next 2.5 or 3 years, and all of it just sits there in cash, that I will have lost 4.63% in interest on the cash I owe the mortgage company.   Which will be around a $1900 loss -- I've calculated it.  But I am betting something will happen to market in the next 2-3 years which might cause a big dip and I can snatch up some deals, which might end up far greater gains the the $1900 lost by not fasting paying mortage.
« Last Edit: March 22, 2022, 04:59:20 PM by JenniferW »

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #42 on: March 22, 2022, 04:45:18 PM »
If VTI drops into the $135-175 range (or lower) for an extended period, then I'll just keep investing in the stock market and the mortgage will continue to be paid off with the minimum payment.  No matter what, with minimum payment the mortgage will be paid off in 11.5 years.  I've been paying it for 8.5 years currently.  So at a minimum I will have paid of a 30 year loan in 20 years.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #43 on: March 22, 2022, 05:10:53 PM »
ptf

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #44 on: March 22, 2022, 05:12:13 PM »
This is just a market timing and "should I pay off my mortgage" thread rolled into one! (my answer to both is "no"). Those are always boring and pointless, so I'm out.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #45 on: March 22, 2022, 05:28:56 PM »
This is just a market timing and "should I pay off my mortgage" thread rolled into one! (my answer to both is "no"). Those are always boring and pointless, so I'm out.

You're right I'm timing the market. Stock buy backs, incredibly low interest rates with record inflation, housing bubble, ridiculously high CAPE (Shiller PE Ratio), global instability, etc..  In the short term I think there is a high chance my buy limit orders will execute.

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #46 on: March 22, 2022, 06:41:43 PM »
Interesting idea/experiment.  Personally, I agree with paying off mortgage for many reasons.

Have you considered buying i-bonds?  Paying about 7% right now.  There is at least 1 thread here if you want to read about it.

jnw

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #47 on: March 23, 2022, 12:59:02 AM »
Interesting idea/experiment.  Personally, I agree with paying off mortgage for many reasons.

Have you considered buying i-bonds?  Paying about 7% right now.  There is at least 1 thread here if you want to read about it.

Where can I get an international bond for 7%.  And is it guaranteed or can you lose money on it if the market crashes?   How many years do you have to keep the money invested for this rate?

To be honest I really don't know anything bonds at all.  Never invested in them, nor read about them.  I mostly read about investing in index funds:  Bogleheads & JL Collins.

EDIT: I just watched a few short videos on bond investing.  Yeah they come with more risk the higher the percentage return.  Governments or corporations defaulting etc.
« Last Edit: March 23, 2022, 01:07:55 AM by JenniferW »

MoseyingAlong

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #48 on: March 23, 2022, 06:44:00 AM »
Interesting idea/experiment.  Personally, I agree with paying off mortgage for many reasons.

Have you considered buying i-bonds?  Paying about 7% right now.  There is at least 1 thread here if you want to read about it.

Where can I get an international bond for 7%.  And is it guaranteed or can you lose money on it if the market crashes?   How many years do you have to keep the money invested for this rate?

To be honest I really don't know anything bonds at all.  Never invested in them, nor read about them.  I mostly read about investing in index funds:  Bogleheads & JL Collins.

EDIT: I just watched a few short videos on bond investing.  Yeah they come with more risk the higher the percentage return.  Governments or corporations defaulting etc.

i-bonds means Series I savings bond from the US Treasury.
The rate changes every 6 months and has 2 components. One changes, the other is fixed when you buy them.

Highly recommend them. There are several threads here and on Bogleheads about them. For the details, go to the source treasurydirect.gov

https://treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

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Re: Mortgage Payoff / Emergency Fund Brokerage Account
« Reply #49 on: March 23, 2022, 07:42:30 AM »
I think you've mashed up 3 different decisions into one, which is making it seem more complicated and controversial than it really is.

1) Do you need an emergency fund? You have decided you do not, which is a reasonable decision.

2) Should you pay down extra to your mortgage each month? You have decided not to, which is a reasonable decision.

3) Should you set aside a small amount of your portfolio to market time with? You have decided to do this. I wouldn't, but it shouldn't hurt you too much if things go wrong, so really not a big deal.

 

Wow, a phone plan for fifteen bucks!