RPF0445-Pay_Off_House_or_Invest_15_Percent
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00:00:31.000 | Today on Radical Personal Finance,
00:00:33.000 | a listener writes in and says,
00:00:34.000 | "We are working like crazy to get our house paid off
00:00:36.000 | in the next two or three years,
00:00:38.000 | but we're not sure whether we should bump
00:00:40.000 | our retirement savings up from 10% of our income
00:00:43.000 | to 15% of our income like Dave Ramsey recommends,
00:00:46.000 | or if we should just stay completely focused
00:00:49.000 | on paying the house off.
00:00:51.000 | Please help."
00:00:53.000 | ♪
00:01:09.000 | Welcome to Radical Personal Finance Podcast,
00:01:11.000 | the show dedicated to providing you with the knowledge,
00:01:13.000 | skills, insight, and encouragement you need
00:01:16.000 | to live a rich and meaningful life now
00:01:18.000 | while building a plan for financial freedom
00:01:20.000 | in 10 years or less.
00:01:21.000 | Today's guest, or not guest, listener,
00:01:24.000 | today's listener question, they're on track.
00:01:26.000 | They're trying to be financially independent in 10 years,
00:01:28.000 | and they're trying to figure out,
00:01:29.000 | "Do I pay off the house, or do I stay focused on investing?"
00:01:33.000 | ♪
00:01:41.000 | Talia writes in this note, and she says this,
00:01:45.000 | "Joshua, my husband and I love your show
00:01:47.000 | and would love it if you could help us answer a question
00:01:49.000 | from your point of view.
00:01:51.000 | We are completely debt-free except for our house.
00:01:53.000 | We make around $130,000 a year.
00:01:56.000 | We're currently investing 10% of our income for retirement
00:01:59.000 | into a matching 401(k) plan, and also a 401(a)
00:02:03.000 | and a Roth account, etc.,
00:02:05.000 | but we're dead set on paying off the house
00:02:07.000 | in the next two and a half or three years.
00:02:10.000 | Our dilemma is this.
00:02:11.000 | Dave Ramsey suggests saving 15% for retirement
00:02:14.000 | for someone in our position.
00:02:16.000 | We can do this, but that'll slow down our house payment goal
00:02:19.000 | quite substantially, or in my mind, it's substantial,
00:02:22.000 | as I want this house paid off tomorrow.
00:02:25.000 | The goal after the house repayment is to throw everything
00:02:27.000 | we can spare towards investing in retirement funds.
00:02:30.000 | Should we stay strong on our course to pay off the house
00:02:33.000 | in three years and only save about 10% for retirement,
00:02:37.000 | or do we bump up our retirement savings?
00:02:40.000 | And how do I figure out the opportunity cost
00:02:42.000 | in each scenario? Thanks so much, Talia."
00:02:45.000 | So I corresponded with Talia a little bit more,
00:02:47.000 | and here are the basic numbers of the situation.
00:02:50.000 | They owe about $145,000 on the house,
00:02:53.000 | but their expenses are quite low,
00:02:55.000 | so that with this $130,000 a year income,
00:02:57.000 | they currently have about $3,600 a month available
00:03:01.000 | that they're not sure what to do with.
00:03:04.000 | Well, they're using most of that for the house,
00:03:07.000 | but they could put some of that into retirement
00:03:10.000 | or some of that into the house payment.
00:03:15.000 | So let's answer this question,
00:03:17.000 | and let's start with a couple of ground rule facts
00:03:22.000 | that you've got to pay attention to when you get down to it.
00:03:28.000 | At the end of the day, the decision of whether it's better
00:03:32.000 | for you to pay off the house or to retire financially
00:03:39.000 | in terms of what we can calculate is 100% driven
00:03:44.000 | by the rate of return that you'll earn
00:03:48.000 | on your investment portfolio
00:03:52.000 | or the rate of return that you'll earn
00:03:54.000 | by paying down your debt.
00:03:57.000 | It's very simple math.
00:03:59.000 | Now, in this case, Talia and Jason,
00:04:01.000 | it's her husband, Talia and Jason,
00:04:03.000 | their mortgage is at a 4.5% interest rate.
00:04:07.000 | So financially, if your investment portfolio
00:04:12.000 | will return in excess of 4.5%,
00:04:17.000 | then it's better to invest financially.
00:04:21.000 | If your investment portfolio will return less than 4.5%,
00:04:26.000 | then it's better to pay off the house.
00:04:29.000 | That's the strict financial discussion.
00:04:34.000 | Now, that's the first thing to get very clear.
00:04:37.000 | There are a couple of other minor calculations
00:04:41.000 | that should also be done in order to get a perfect answer.
00:04:45.000 | The first is to recognize any extra or free money
00:04:49.000 | that you get by choosing to invest for retirement.
00:04:52.000 | This is where the employer matches become important
00:04:56.000 | because the amount of money that you get
00:05:00.000 | from an employer match is free and extra money
00:05:02.000 | that comes into your life that if you don't contribute,
00:05:06.000 | you don't get.
00:05:08.000 | Once that contribution is gone,
00:05:10.000 | once that calendar year is done,
00:05:12.000 | that opportunity doesn't come back.
00:05:14.000 | So now you would have to figure out
00:05:16.000 | the rate of return on that.
00:05:18.000 | Most people don't need to do this,
00:05:20.000 | but I want to make the point very clear
00:05:22.000 | as far as what the math is.
00:05:24.000 | If you were comparing the return of paying off your house
00:05:27.000 | at a 4.5% effective interest rate
00:05:30.000 | and you were going to compare that
00:05:32.000 | to putting money into the investment account,
00:05:34.000 | if your investment accounts only returned 3%
00:05:37.000 | but your employer match was enough
00:05:39.000 | to make up the difference,
00:05:41.000 | then you're better off investing and taking the match.
00:05:44.000 | So you've got to factor the match in.
00:05:47.000 | And let me give you the rules of thumb as we go.
00:05:50.000 | The rule of thumb here on the match
00:05:52.000 | is that generally you always want to take advantage of the match.
00:05:56.000 | You always want to put at least as much
00:05:58.000 | in a retirement account to take advantage of the match.
00:06:01.000 | The rule of thumb on paying off the house early
00:06:03.000 | versus investing for retirement is
00:06:05.000 | generally you want to invest for retirement to the max
00:06:08.000 | because most people should make more in their investments
00:06:11.000 | if their investments are well allocated
00:06:13.000 | than you get by paying off the house early.
00:06:16.000 | So these are the rules of thumb.
00:06:18.000 | Now the third factor is the tax considerations.
00:06:21.000 | So if you have the possibility, if you have high income,
00:06:24.000 | you have to recognize that by contributing
00:06:27.000 | to a retirement account,
00:06:31.000 | then you're lowering your income
00:06:33.000 | during a year in which it's high,
00:06:36.000 | and that can help you save on taxes.
00:06:39.000 | So here, Talia and Jason,
00:06:41.000 | if each of you were to take this excess money
00:06:44.000 | and you were to max out a 401(k)
00:06:46.000 | and you were to put $18,000 in for each of you,
00:06:50.000 | this year is your contribution,
00:06:52.000 | that would drop $36,000 off your top-end income.
00:06:56.000 | And that could have a substantial impact
00:06:58.000 | on your tax savings.
00:07:00.000 | You don't get that savings
00:07:03.000 | if you put the money into paying off the house early.
00:07:08.000 | So if you have to take all of that extra $36,000
00:07:12.000 | that could defer the taxation,
00:07:14.000 | you could put it right in a 401(k),
00:07:16.000 | but you have to go ahead and pay the tax now
00:07:18.000 | and then pay the mortgage down with those after-tax dollars,
00:07:22.000 | generally the rule of thumb is
00:07:24.000 | you want to prioritize, financially speaking,
00:07:27.000 | you want to prioritize putting money
00:07:30.000 | into the retirement account
00:07:33.000 | because you'll be able to defer the income tax
00:07:36.000 | to a future year when your income will probably be lower,
00:07:40.000 | and you won't have to use after-tax dollars
00:07:43.000 | to pay down your mortgage,
00:07:45.000 | and you won't be giving up
00:07:47.000 | a possible mortgage interest tax deduction that you have.
00:07:51.000 | Now, the mortgage interest tax deduction
00:07:53.000 | is quite overrated.
00:07:55.000 | It does exist.
00:07:56.000 | You can itemize your deductions,
00:08:00.000 | and you can deduct your mortgage interest
00:08:03.000 | as an itemized deduction.
00:08:06.000 | Most people, especially most people
00:08:07.000 | with a mortgage balance of $145,000,
00:08:10.000 | aren't going to find this to be particularly useful.
00:08:13.000 | Most likely, you're just using the standard deduction.
00:08:16.000 | So the whole kerfuffle over
00:08:18.000 | your being able to deduct your mortgage interest or not
00:08:20.000 | in your situation is most likely not relevant.
00:08:24.000 | Now, if you had a million-dollar mortgage,
00:08:26.000 | this would be very relevant
00:08:28.000 | because the mortgage interest deduction
00:08:30.000 | for a house owner, a mortgagee,
00:08:35.000 | who has a million-dollar mortgage balance,
00:08:37.000 | that's going to be a lot of money,
00:08:39.000 | and that could be a very valuable tax deduction
00:08:41.000 | to have in place if you have a million-dollar mortgage.
00:08:44.000 | So those are the major financial considerations.
00:08:48.000 | Number one is what's the rate of return
00:08:52.000 | of the portfolio versus the rate of return
00:08:54.000 | of the mortgage, paying it off.
00:08:56.000 | Number two is how much money extra are you getting
00:09:00.000 | for putting money into the retirement account.
00:09:04.000 | And then number three is what are the tax considerations.
00:09:08.000 | And all three of those things would point
00:09:12.000 | toward the importance of your maximizing
00:09:18.000 | your retirement contribution
00:09:20.000 | and minimizing your extra house payments.
00:09:23.000 | Those financial cards are stacked in favor
00:09:28.000 | of contributing to retirement.
00:09:31.000 | But that's not the whole story.
00:09:34.000 | Because what I hear in your email
00:09:37.000 | is this extreme focus on paying off the mortgage.
00:09:42.000 | And I understand this and feel this myself
00:09:47.000 | because there's a wild card here, which is focus.
00:09:52.000 | Most people who have $130,000 income
00:09:56.000 | don't have $3,600 available per month
00:10:02.000 | to try to figure out what to do with.
00:10:04.000 | That's a total of $43,200 per year.
00:10:08.000 | Now, it's possible that because you're so focused
00:10:12.000 | on paying off the mortgage, because of that fact,
00:10:17.000 | you will continue to scrimp and save
00:10:22.000 | and put everything towards that mortgage
00:10:24.000 | with a goal of getting it gone as quickly as possible.
00:10:30.000 | And it's possible that if you're just putting that money
00:10:32.000 | into retirement accounts, because at this point
00:10:34.000 | the growth will be slow and not particularly exciting,
00:10:37.000 | it's possible that you won't be as enthusiastic
00:10:39.000 | and as excited about the prospect.
00:10:42.000 | So I think of this as the emotional motivation.
00:10:45.000 | The idea of paying off debt is extremely motivating.
00:10:49.000 | And I've found for me, when I'm trying to pay off debt,
00:10:52.000 | that it causes me to make different decisions.
00:10:54.000 | And it's a whole lot easier to look at an account balance
00:10:57.000 | and say, "Grr, I hate this thing.
00:10:59.000 | I'm going to get this mortgage gone,
00:11:01.000 | I'm going to get it done by our birthday coming up in two years
00:11:04.000 | or the year 2020 or whatever it is."
00:11:06.000 | It's a whole lot easier to stay focused on paying off debt
00:11:09.000 | than it is for me to stay focused on putting money aside for investing.
00:11:16.000 | So I think of this as a wild card.
00:11:18.000 | Now, let's run some scenarios and run a couple of numbers
00:11:20.000 | in your situation, because I think this is very valuable
00:11:24.000 | to demonstrate what the potential impact of this decision is here.
00:11:32.000 | And we'll get to my recommendation for you in a moment.
00:11:37.000 | The best way to do these calculations is to use a spreadsheet.
00:11:41.000 | And I will – I think it should still be available on the Internet.
00:11:44.000 | I'll point you towards one that I've used for years
00:11:46.000 | and I always send to my clients.
00:11:48.000 | It's called the Debt Reduction Calculator
00:11:50.000 | and it's hosted on a website called Vertex42.
00:11:54.000 | I'll link it – either I have it – I'll either link it to where I host it
00:11:58.000 | on my own site or I'll link it in the show notes for today's show.
00:12:01.000 | Just come on by the blog at RadicalPersonalFinance.com
00:12:04.000 | and you'll find this.
00:12:05.000 | But you put into this – this spreadsheet is very useful
00:12:08.000 | for figuring out what your total interest payments are
00:12:11.000 | when you're trying to figure out, "Do I do a debt snowball approach
00:12:14.000 | or do I – where you pay off the lowest balance first
00:12:17.000 | or do I pay off the lowest interest first," et cetera.
00:12:19.000 | In this case, just because I use this spreadsheet all the time,
00:12:21.000 | it's the first place I go because it allows me to put in an amount of money
00:12:25.000 | that I am paying and it allows me to put in just a standard payment
00:12:30.000 | and figure out, "Well, what would be the results if I just continue to pay this
00:12:34.000 | and how long will it take if I pay extra?"
00:12:37.000 | So in your situation, if you were paying your mortgage as agreed,
00:12:40.000 | you would have about – with $145,000 balance
00:12:45.000 | and your monthly payment is $960 at a 4.5% interest rate.
00:12:50.000 | Under the current normal mortgage schedule,
00:12:53.000 | this payment would be paid off in 224 months.
00:12:57.000 | So 224 months is about 18.5 years.
00:13:01.000 | So under your current schedule, your schedule would be paid off 18.5 years.
00:13:05.000 | Now, scenario A is if you take – you continue to save 10% of your income
00:13:11.000 | for retirement, which is what you're currently doing.
00:13:13.000 | You save 10% of your income for retirement.
00:13:15.000 | That leaves you with an extra $3,600 per month.
00:13:19.000 | If you choose to put that toward the house payoff, you'll have 34 months
00:13:27.000 | and that house will be paid off in 34 months.
00:13:31.000 | You'll go from paying a total of $69,000 of interest.
00:13:38.000 | Under your current mortgage schedule, you'll have an additional $69,000 of interest
00:13:42.000 | and you'll cut that bill down to $9,700 of interest.
00:13:49.000 | Now, remember, it's easy to get focused on this interest savings
00:13:53.000 | and you do save interest when you pay off the mortgage.
00:13:56.000 | But mathematically, if your investment account would return in excess of 4.5%
00:14:02.000 | and if there would be enough mathematical weight there with the tax benefits
00:14:07.000 | of investing in a 401(k) versus the loss of tax benefits here with a mortgage,
00:14:13.000 | you would wind up having far more money in the retirement account.
00:14:17.000 | So don't get too focused on the interest as we work through this.
00:14:20.000 | So 34 months, if you put this $3,600, you'll be out of debt in 34 months
00:14:25.000 | and you'll save yourself a lot of money in interest.
00:14:29.000 | If you kick up your retirement investing from 10% to 15%,
00:14:35.000 | that means that you'll have to put an extra $600 a month into your retirement account.
00:14:42.000 | Your income, 5% of your income of $130,000 is $6,500 a year,
00:14:51.000 | which comes out to about $600 a month.
00:14:54.000 | So that means that you have an extra $3,000 a month to put toward the paying off the house.
00:15:01.000 | Well, in that scenario, it would now take you 40 months, an extra 6 months
00:15:06.000 | to be able to pay off the house.
00:15:09.000 | So that would be a little bit out of your 2.5 to 3-year time frame.
00:15:16.000 | There are, however, other options.
00:15:19.000 | Option B is the answer of the 10% versus the 15%.
00:15:24.000 | In this scenario, I don't see much of a benefit for you to just go to 10 to 15.
00:15:29.000 | In this situation, I would lean towards going a little bit quicker.
00:15:35.000 | Now, let's go to option C.
00:15:37.000 | Option C is, "Hey, listen, Joshua, we're serious about paying off the house,
00:15:42.000 | and I don't think this is a foolish option.
00:15:45.000 | I've sold here at the beginning.
00:15:47.000 | I've sold the concept of investing in retirement accounts
00:15:49.000 | as being the financially superior option.
00:15:52.000 | In just a moment, I'll talk about the value of pursuing this option."
00:15:57.000 | Option C would be, "Let's stop investing in retirement accounts completely,
00:16:02.000 | and let's just drop down to the match.
00:16:07.000 | We just put the money in the match."
00:16:09.000 | Well, that would free up a total of $4,600 a month extra
00:16:18.000 | that can be put into the mortgage payment,
00:16:20.000 | and in 28 months, you would have that mortgage payment gone.
00:16:28.000 | So we dropped down to 28 months, just over two years.
00:16:31.000 | Then I calculated just to see how long it would take.
00:16:34.000 | If you took all the money that you're currently putting into retirement accounts,
00:16:39.000 | including in their situation, they only have--Talia and Jason only have
00:16:44.000 | one retirement account where they get an employer match,
00:16:47.000 | and it's 3% of a $50,000 wage.
00:16:50.000 | So they get a $1,500 employer match.
00:16:54.000 | If you dropped even out the employer match, you would be out of debt in 27 months.
00:17:00.000 | So what would I advise you to do if I were in your situation?
00:17:05.000 | Well, what I hear coming loud and clear through your email is this.
00:17:10.000 | "We are dead set on paying off the house in the next two and a half to three years."
00:17:18.000 | That's strong language, and that tells me that you're not trying to sit down
00:17:23.000 | and make a dispassionate financial decision about what is going to result in more money
00:17:30.000 | 30 years from now.
00:17:32.000 | If you were, I think the financial arguments all go in favor of keeping your mortgage,
00:17:39.000 | paying just the standard, paying it as agreed,
00:17:42.000 | and putting all the extra money towards your investments.
00:17:45.000 | I think the financial argument is very strong there,
00:17:49.000 | and it's a hard argument to go against.
00:17:52.000 | But I don't think you're stupid for focusing on paying off the house
00:17:56.000 | because the personal finance argument, the impact on your life
00:18:01.000 | of having the house paid off is potentially huge.
00:18:07.000 | Potentially huge.
00:18:09.000 | And the fact that you're in a situation wherein just a little over two years
00:18:16.000 | you could have your house payment gone is really, really powerful.
00:18:23.000 | Now, Talia's 28, husband Jason is 34 years old.
00:18:28.000 | If you think about Talia something like by your 30th birthday,
00:18:32.000 | having your house completely paid off,
00:18:35.000 | and then being able to live entirely debt-free, including entirely mortgage-free
00:18:40.000 | for the rest of your life, to me that is something that is really, really exciting.
00:18:46.000 | And that would provide such a strong financial foundation under your life
00:18:51.000 | where you would still have this wonderful income,
00:18:54.000 | and you would still have massive amounts of money available to invest,
00:19:01.000 | and yet you would have no debt.
00:19:04.000 | You would have all kinds of options available to you.
00:19:07.000 | You'd have the options to change jobs, change careers.
00:19:11.000 | You have the option to purchase rental houses.
00:19:15.000 | There's all kinds of things that you could do in that situation.
00:19:19.000 | And when it comes to the power of being debt-free, man, I love that.
00:19:24.000 | For most people, most people would not be in a situation wherein a couple years
00:19:30.000 | they could have the house paid off.
00:19:33.000 | For most people an aggressive house payoff plan would be something like 10 years.
00:19:37.000 | In that situation, I couldn't in good--you have to be aware that investing
00:19:43.000 | and getting the money working in investments is so powerful.
00:19:46.000 | But in your situation, with you having the potential ability to do this thing in two years,
00:19:51.000 | I've got to say, I'm kind of in your camp.
00:19:57.000 | If I were in the situation, I would have to think very long and very hard about it.
00:20:02.000 | I don't think I would make it as an exclusively financial, dispassionate financial decision.
00:20:09.000 | I really couldn't make it that way.
00:20:11.000 | It's hard for me--and, no, you're pursuing early retirement.
00:20:17.000 | I know that from correspondence as well.
00:20:19.000 | If your investments can't produce in excess of a 4.5% return, which is amplified by the employer match,
00:20:28.000 | which is amplified by the tax deductions, et cetera, basically none of the financial plans work
00:20:39.000 | because you can't get in excess of that.
00:20:41.000 | So all of the financial planning methodology basically falls apart.
00:20:46.000 | I'm not saying that some people can't do planning with 4.5%.
00:20:50.000 | But what I mean is we build most of the models on the historical return of the U.S. stock market,
00:21:00.000 | large-cap stocks of about 10%.
00:21:04.000 | And lately, many financial planners have pulled back to a more conservative 7% or 8%.
00:21:10.000 | But still, when you run the tables of that going forward, you're in excess of 4.5%.
00:21:15.000 | And so you win by investing.
00:21:18.000 | But every time I look at the thought of two years, two years of hard work,
00:21:23.000 | my mind always goes back to how much are you willing to hustle to have this thing gone.
00:21:30.000 | When somebody tells me we are dead set on paying off the house in the next two and a half or three years,
00:21:37.000 | I hear motivation.
00:21:39.000 | I hear motivation to cut expenses.
00:21:42.000 | I hear motivation to increase income.
00:21:45.000 | And I hear motivation to really crush this goal.
00:21:50.000 | And I think of that as an X factor.
00:21:52.000 | It's something that I can't fit into a spreadsheet.
00:21:55.000 | I can't model it.
00:21:57.000 | But I know it's been powerful in my life.
00:22:01.000 | And it sounds to me like it's powerful in your life.
00:22:06.000 | I think if I had a gleam in my eyes the way that you do, if I woke up in your shoes, here's what I would do.
00:22:16.000 | I would stop contributing to all of my retirement accounts, except for the one that gives the employer match,
00:22:24.000 | although I would maybe pause on that as well.
00:22:26.000 | And I would stack this money up in a side account as quickly as possible for the next few months.
00:22:33.000 | This is April.
00:22:35.000 | I would calculate when you need to start putting contributions into the retirement account to get the employer match.
00:22:42.000 | Let's just ignore the employer match.
00:22:44.000 | You want to get that match.
00:22:45.000 | I can't.
00:22:46.000 | No matter how much I want to be debt-free, it makes no material difference.
00:22:50.000 | It makes a one-month difference, a difference between 27 and 28 months at our most aggressive calculation here.
00:22:56.000 | So you've got to get that match.
00:22:57.000 | You can't walk away from free money.
00:23:00.000 | But with everything else, I would set everything aside.
00:23:05.000 | I wouldn't necessarily start writing checks to the mortgage balance immediately.
00:23:10.000 | What I would do is I would put the money in cash, and I would wait, and I would watch.
00:23:15.000 | I'd watch the markets and try to guess a little bit at what the markets are doing.
00:23:20.000 | If we go into a period, let's say that it's April as I answer this question.
00:23:24.000 | If the markets continue to be high, they continue to be strong, prices continue to be high,
00:23:30.000 | and we look at April and we're saying, "Okay, it's May, June, July, August, September, October.
00:23:37.000 | Prices are still high.
00:23:39.000 | Maybe we're a little bit flat, a little bit high."
00:23:41.000 | In that situation, I'm happy because I'm still happy to stay focused on paying off the house.
00:23:49.000 | But knowing what I know about the benefits of investing over paying off the house,
00:23:56.000 | I would want to have that money sitting there.
00:23:59.000 | And if we had some kind of dramatic market downturn, dramatic drop, some kind of dramatic correction,
00:24:06.000 | I would want to have that money still available to me to possibly pull over and say,
00:24:11.000 | "Let me go ahead and invest it."
00:24:13.000 | And if you had a 20% correction, something like that, 30% would be great.
00:24:21.000 | I'd turn over there and I'd put the money in the market.
00:24:24.000 | I know that probably violates kind of the whole logic we just went through,
00:24:28.000 | but it's like pulling teeth for me.
00:24:30.000 | I can't admit, I can't say that it's better to pay off the house,
00:24:34.000 | even though in my gut I feel it.
00:24:37.000 | I feel it and I want you to pay off the house.
00:24:39.000 | I really want it.
00:24:41.000 | But that's my struggle.
00:24:45.000 | It financially, it's just--I would pile up the money in an external account so I have access to it.
00:24:56.000 | And with this, I'll be done.
00:24:57.000 | Just a quick little comment.
00:24:59.000 | In your situation, you can stroke checks to the mortgage company and that will work
00:25:04.000 | because your timeline is so short.
00:25:06.000 | But I've learned the hard way how not fun it is to not have liquid cash.
00:25:12.000 | What I encourage people to do is set aside the money in an account.
00:25:16.000 | And if it takes you a year and you want to make a big chunk,
00:25:19.000 | make sure that you're piling up $145,000 in a checking account
00:25:23.000 | and then stroke a check all at one time.
00:25:26.000 | Because what I've learned the hard way is there's value to your having a high mortgage balance
00:25:34.000 | and a lot of money in the bank because then you have total liquidity.
00:25:37.000 | If you need to move, something happens in your plan, something changes,
00:25:40.000 | somebody gets laid off, I want you to have $50,000 in the bank.
00:25:43.000 | If there's a 30% market downturn, I want you to have money to be able to pull over
00:25:48.000 | and buy stocks like crazy.
00:25:51.000 | You need to have money in the bank.
00:25:53.000 | And so you want to make sure that you keep the money liquid.
00:25:56.000 | There's also benefit in having a mortgage balance of zero
00:26:00.000 | because that takes risk out of your life.
00:26:02.000 | If you have a mortgage balance of zero, you can always make that mortgage payment.
00:26:08.000 | You can drop your insurance if you need to on your house if you run out of money.
00:26:12.000 | With a mortgage balance of zero, you've got safety.
00:26:14.000 | And there's a real benefit in a mortgage balance of zero.
00:26:17.000 | But during the whole in-between period from 145 to zero, there's no benefit.
00:26:24.000 | If your mortgage balance is $75,000, you've still got to make your $960 payment.
00:26:30.000 | And if you don't have money in the bank, it doesn't do you any good.
00:26:35.000 | You get laid off and you've got a mortgage balance of 75, it's not helpful
00:26:39.000 | because next month you've got to make that mortgage payment.
00:26:42.000 | So what I would do is I would take a wait-and-see approach
00:26:47.000 | and I would watch the markets and I would watch my bank account.
00:26:52.000 | Work like crazy, pile the money up as quickly as possible,
00:26:56.000 | and decide more towards the end of the year.
00:26:59.000 | Remember, you can always make contributions to IRAs after the end of the year,
00:27:04.000 | and you can always make contributions to the 401(k) at the end of the year.
00:27:08.000 | If you get to the point where in about, let's say, September or October,
00:27:11.000 | you decide, "No, we do want to go ahead and make 401(k) contributions,"
00:27:15.000 | put 100% of your paycheck into the 401(k) in those last few months
00:27:19.000 | to get the contributions in there before the end of the tax year.
00:27:23.000 | So that's kind of my approach.
00:27:26.000 | To summarize, the difference of what's better financially
00:27:31.000 | is primarily based upon what's the highest interest rate,
00:27:36.000 | and that's very minorly affected by the tax benefits of investing pre-tax dollars
00:27:41.000 | into a retirement account, and it's very, very minorly,
00:27:45.000 | and probably in your case not at all affected by the loss
00:27:48.000 | of a potential mortgage interest deduction.
00:27:51.000 | But the big one, it's all about interest rate.
00:27:53.000 | If your investments return 7% and your mortgage is 4.5%,
00:27:58.000 | you're better off investing, period.
00:28:01.000 | We don't know when the 7% is coming.
00:28:03.000 | We don't know if it's going to come.
00:28:05.000 | If you're putting a lot of value in getting a guaranteed 4.5%,
00:28:09.000 | it's very hard to get a guaranteed 4.5% out there today.
00:28:13.000 | I probably short-circuited that argument.
00:28:15.000 | Let me just amplify on it before I hit stop.
00:28:18.000 | It's very hard to find a 4.5% guaranteed return.
00:28:22.000 | So if you're one who is concerned about risk,
00:28:26.000 | if you're one who is a novice investor,
00:28:30.000 | you need to make that 4.5% guaranteed return will feel pretty good
00:28:34.000 | when you're in a debt-free house.
00:28:36.000 | Financially, the arguments are all in favor of putting the money
00:28:41.000 | into your 401(k)s.
00:28:44.000 | If I woke up in your shoes, I think I'd be paying my house off
00:28:48.000 | with a goal of getting it done by my 30th birthday
00:28:50.000 | and then go all in on retirement investing at that point in time.
00:28:54.000 | And if I'd be watching the markets, and if you get lucky enough
00:28:57.000 | to get some kind of 30% downturn, 40% downturn in the next couple years,
00:29:03.000 | don't miss that because you're paying off your house.
00:29:08.000 | If we get a big correction or a big recession that drives a big correction,
00:29:14.000 | don't miss that buying opportunity.
00:29:18.000 | That's all I got.
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