♪ Blessing in the mornin' ♪ ♪ Come back Sunday morning ♪ California's top casino and entertainment destination is now your California to Vegas connection. Play at Yamava Resort and Casino at San Manuel to earn points, rewards, and complimentary experiences for the iconic Palms Casino Resort in Las Vegas. ♪ We got the store to sell ♪ Two destinations, one loyalty card.

Visit yamava.com/palms to discover more. Today on Radical Personal Finance, a listener writes in and says, "We are working like crazy to get our house paid off in the next two or three years, but we're not sure whether we should bump our retirement savings up from 10% of our income to 15% of our income like Dave Ramsey recommends, or if we should just stay completely focused on paying the house off.

Please help." ♪ Welcome to Radical Personal Finance Podcast, the show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less. Today's guest, or not guest, listener, today's listener question, they're on track.

They're trying to be financially independent in 10 years, and they're trying to figure out, "Do I pay off the house, or do I stay focused on investing?" ♪ Talia writes in this note, and she says this, "Joshua, my husband and I love your show and would love it if you could help us answer a question from your point of view.

We are completely debt-free except for our house. We make around $130,000 a year. We're currently investing 10% of our income for retirement into a matching 401(k) plan, and also a 401(a) and a Roth account, etc., but we're dead set on paying off the house in the next two and a half or three years.

Our dilemma is this. Dave Ramsey suggests saving 15% for retirement for someone in our position. We can do this, but that'll slow down our house payment goal quite substantially, or in my mind, it's substantial, as I want this house paid off tomorrow. The goal after the house repayment is to throw everything we can spare towards investing in retirement funds.

Should we stay strong on our course to pay off the house in three years and only save about 10% for retirement, or do we bump up our retirement savings? And how do I figure out the opportunity cost in each scenario? Thanks so much, Talia." So I corresponded with Talia a little bit more, and here are the basic numbers of the situation.

They owe about $145,000 on the house, but their expenses are quite low, so that with this $130,000 a year income, they currently have about $3,600 a month available that they're not sure what to do with. Well, they're using most of that for the house, but they could put some of that into retirement or some of that into the house payment.

So let's answer this question, and let's start with a couple of ground rule facts that you've got to pay attention to when you get down to it. At the end of the day, the decision of whether it's better for you to pay off the house or to retire financially in terms of what we can calculate is 100% driven by the rate of return that you'll earn on your investment portfolio or the rate of return that you'll earn by paying down your debt.

It's very simple math. Now, in this case, Talia and Jason, it's her husband, Talia and Jason, their mortgage is at a 4.5% interest rate. So financially, if your investment portfolio will return in excess of 4.5%, then it's better to invest financially. If your investment portfolio will return less than 4.5%, then it's better to pay off the house.

That's the strict financial discussion. Now, that's the first thing to get very clear. There are a couple of other minor calculations that should also be done in order to get a perfect answer. The first is to recognize any extra or free money that you get by choosing to invest for retirement.

This is where the employer matches become important because the amount of money that you get from an employer match is free and extra money that comes into your life that if you don't contribute, you don't get. Once that contribution is gone, once that calendar year is done, that opportunity doesn't come back.

So now you would have to figure out the rate of return on that. Most people don't need to do this, but I want to make the point very clear as far as what the math is. If you were comparing the return of paying off your house at a 4.5% effective interest rate and you were going to compare that to putting money into the investment account, if your investment accounts only returned 3% but your employer match was enough to make up the difference, then you're better off investing and taking the match.

So you've got to factor the match in. And let me give you the rules of thumb as we go. The rule of thumb here on the match is that generally you always want to take advantage of the match. You always want to put at least as much in a retirement account to take advantage of the match.

The rule of thumb on paying off the house early versus investing for retirement is generally you want to invest for retirement to the max because most people should make more in their investments if their investments are well allocated than you get by paying off the house early. So these are the rules of thumb.

Now the third factor is the tax considerations. So if you have the possibility, if you have high income, you have to recognize that by contributing to a retirement account, then you're lowering your income during a year in which it's high, and that can help you save on taxes. So here, Talia and Jason, if each of you were to take this excess money and you were to max out a 401(k) and you were to put $18,000 in for each of you, this year is your contribution, that would drop $36,000 off your top-end income.

And that could have a substantial impact on your tax savings. You don't get that savings if you put the money into paying off the house early. So if you have to take all of that extra $36,000 that could defer the taxation, you could put it right in a 401(k), but you have to go ahead and pay the tax now and then pay the mortgage down with those after-tax dollars, generally the rule of thumb is you want to prioritize, financially speaking, you want to prioritize putting money into the retirement account because you'll be able to defer the income tax to a future year when your income will probably be lower, and you won't have to use after-tax dollars to pay down your mortgage, and you won't be giving up a possible mortgage interest tax deduction that you have.

Now, the mortgage interest tax deduction is quite overrated. It does exist. You can itemize your deductions, and you can deduct your mortgage interest as an itemized deduction. Most people, especially most people with a mortgage balance of $145,000, aren't going to find this to be particularly useful. Most likely, you're just using the standard deduction.

So the whole kerfuffle over your being able to deduct your mortgage interest or not in your situation is most likely not relevant. Now, if you had a million-dollar mortgage, this would be very relevant because the mortgage interest deduction for a house owner, a mortgagee, who has a million-dollar mortgage balance, that's going to be a lot of money, and that could be a very valuable tax deduction to have in place if you have a million-dollar mortgage.

So those are the major financial considerations. Number one is what's the rate of return of the portfolio versus the rate of return of the mortgage, paying it off. Number two is how much money extra are you getting for putting money into the retirement account. And then number three is what are the tax considerations.

And all three of those things would point toward the importance of your maximizing your retirement contribution and minimizing your extra house payments. Those financial cards are stacked in favor of contributing to retirement. But that's not the whole story. Because what I hear in your email is this extreme focus on paying off the mortgage.

And I understand this and feel this myself because there's a wild card here, which is focus. Most people who have $130,000 income don't have $3,600 available per month to try to figure out what to do with. That's a total of $43,200 per year. Now, it's possible that because you're so focused on paying off the mortgage, because of that fact, you will continue to scrimp and save and put everything towards that mortgage with a goal of getting it gone as quickly as possible.

And it's possible that if you're just putting that money into retirement accounts, because at this point the growth will be slow and not particularly exciting, it's possible that you won't be as enthusiastic and as excited about the prospect. So I think of this as the emotional motivation. The idea of paying off debt is extremely motivating.

And I've found for me, when I'm trying to pay off debt, that it causes me to make different decisions. And it's a whole lot easier to look at an account balance and say, "Grr, I hate this thing. I'm going to get this mortgage gone, I'm going to get it done by our birthday coming up in two years or the year 2020 or whatever it is." It's a whole lot easier to stay focused on paying off debt than it is for me to stay focused on putting money aside for investing.

So I think of this as a wild card. Now, let's run some scenarios and run a couple of numbers in your situation, because I think this is very valuable to demonstrate what the potential impact of this decision is here. And we'll get to my recommendation for you in a moment.

The best way to do these calculations is to use a spreadsheet. And I will – I think it should still be available on the Internet. I'll point you towards one that I've used for years and I always send to my clients. It's called the Debt Reduction Calculator and it's hosted on a website called Vertex42.

I'll link it – either I have it – I'll either link it to where I host it on my own site or I'll link it in the show notes for today's show. Just come on by the blog at RadicalPersonalFinance.com and you'll find this. But you put into this – this spreadsheet is very useful for figuring out what your total interest payments are when you're trying to figure out, "Do I do a debt snowball approach or do I – where you pay off the lowest balance first or do I pay off the lowest interest first," et cetera.

In this case, just because I use this spreadsheet all the time, it's the first place I go because it allows me to put in an amount of money that I am paying and it allows me to put in just a standard payment and figure out, "Well, what would be the results if I just continue to pay this and how long will it take if I pay extra?" So in your situation, if you were paying your mortgage as agreed, you would have about – with $145,000 balance and your monthly payment is $960 at a 4.5% interest rate.

Under the current normal mortgage schedule, this payment would be paid off in 224 months. So 224 months is about 18.5 years. So under your current schedule, your schedule would be paid off 18.5 years. Now, scenario A is if you take – you continue to save 10% of your income for retirement, which is what you're currently doing.

You save 10% of your income for retirement. That leaves you with an extra $3,600 per month. If you choose to put that toward the house payoff, you'll have 34 months and that house will be paid off in 34 months. You'll go from paying a total of $69,000 of interest.

Under your current mortgage schedule, you'll have an additional $69,000 of interest and you'll cut that bill down to $9,700 of interest. Now, remember, it's easy to get focused on this interest savings and you do save interest when you pay off the mortgage. But mathematically, if your investment account would return in excess of 4.5% and if there would be enough mathematical weight there with the tax benefits of investing in a 401(k) versus the loss of tax benefits here with a mortgage, you would wind up having far more money in the retirement account.

So don't get too focused on the interest as we work through this. So 34 months, if you put this $3,600, you'll be out of debt in 34 months and you'll save yourself a lot of money in interest. If you kick up your retirement investing from 10% to 15%, that means that you'll have to put an extra $600 a month into your retirement account.

Your income, 5% of your income of $130,000 is $6,500 a year, which comes out to about $600 a month. So that means that you have an extra $3,000 a month to put toward the paying off the house. Well, in that scenario, it would now take you 40 months, an extra 6 months to be able to pay off the house.

So that would be a little bit out of your 2.5 to 3-year time frame. There are, however, other options. Option B is the answer of the 10% versus the 15%. In this scenario, I don't see much of a benefit for you to just go to 10 to 15. In this situation, I would lean towards going a little bit quicker.

Now, let's go to option C. Option C is, "Hey, listen, Joshua, we're serious about paying off the house, and I don't think this is a foolish option. I've sold here at the beginning. I've sold the concept of investing in retirement accounts as being the financially superior option. In just a moment, I'll talk about the value of pursuing this option." Option C would be, "Let's stop investing in retirement accounts completely, and let's just drop down to the match.

We just put the money in the match." Well, that would free up a total of $4,600 a month extra that can be put into the mortgage payment, and in 28 months, you would have that mortgage payment gone. So we dropped down to 28 months, just over two years. Then I calculated just to see how long it would take.

If you took all the money that you're currently putting into retirement accounts, including in their situation, they only have--Talia and Jason only have one retirement account where they get an employer match, and it's 3% of a $50,000 wage. So they get a $1,500 employer match. If you dropped even out the employer match, you would be out of debt in 27 months.

So what would I advise you to do if I were in your situation? Well, what I hear coming loud and clear through your email is this. "We are dead set on paying off the house in the next two and a half to three years." That's strong language, and that tells me that you're not trying to sit down and make a dispassionate financial decision about what is going to result in more money 30 years from now.

If you were, I think the financial arguments all go in favor of keeping your mortgage, paying just the standard, paying it as agreed, and putting all the extra money towards your investments. I think the financial argument is very strong there, and it's a hard argument to go against. But I don't think you're stupid for focusing on paying off the house because the personal finance argument, the impact on your life of having the house paid off is potentially huge.

Potentially huge. And the fact that you're in a situation wherein just a little over two years you could have your house payment gone is really, really powerful. Now, Talia's 28, husband Jason is 34 years old. If you think about Talia something like by your 30th birthday, having your house completely paid off, and then being able to live entirely debt-free, including entirely mortgage-free for the rest of your life, to me that is something that is really, really exciting.

And that would provide such a strong financial foundation under your life where you would still have this wonderful income, and you would still have massive amounts of money available to invest, and yet you would have no debt. You would have all kinds of options available to you. You'd have the options to change jobs, change careers.

You have the option to purchase rental houses. There's all kinds of things that you could do in that situation. And when it comes to the power of being debt-free, man, I love that. For most people, most people would not be in a situation wherein a couple years they could have the house paid off.

For most people an aggressive house payoff plan would be something like 10 years. In that situation, I couldn't in good--you have to be aware that investing and getting the money working in investments is so powerful. But in your situation, with you having the potential ability to do this thing in two years, I've got to say, I'm kind of in your camp.

If I were in the situation, I would have to think very long and very hard about it. I don't think I would make it as an exclusively financial, dispassionate financial decision. I really couldn't make it that way. It's hard for me--and, no, you're pursuing early retirement. I know that from correspondence as well.

If your investments can't produce in excess of a 4.5% return, which is amplified by the employer match, which is amplified by the tax deductions, et cetera, basically none of the financial plans work because you can't get in excess of that. So all of the financial planning methodology basically falls apart.

I'm not saying that some people can't do planning with 4.5%. But what I mean is we build most of the models on the historical return of the U.S. stock market, large-cap stocks of about 10%. And lately, many financial planners have pulled back to a more conservative 7% or 8%.

But still, when you run the tables of that going forward, you're in excess of 4.5%. And so you win by investing. But every time I look at the thought of two years, two years of hard work, my mind always goes back to how much are you willing to hustle to have this thing gone.

When somebody tells me we are dead set on paying off the house in the next two and a half or three years, I hear motivation. I hear motivation to cut expenses. I hear motivation to increase income. And I hear motivation to really crush this goal. And I think of that as an X factor.

It's something that I can't fit into a spreadsheet. I can't model it. But I know it's been powerful in my life. And it sounds to me like it's powerful in your life. 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.

I would stop contributing to all of my retirement accounts, except for the one that gives the employer match, although I would maybe pause on that as well. And I would stack this money up in a side account as quickly as possible for the next few months. This is April.

I would calculate when you need to start putting contributions into the retirement account to get the employer match. Let's just ignore the employer match. You want to get that match. I can't. No matter how much I want to be debt-free, it makes no material difference. It makes a one-month difference, a difference between 27 and 28 months at our most aggressive calculation here.

So you've got to get that match. You can't walk away from free money. But with everything else, I would set everything aside. I wouldn't necessarily start writing checks to the mortgage balance immediately. What I would do is I would put the money in cash, and I would wait, and I would watch.

I'd watch the markets and try to guess a little bit at what the markets are doing. If we go into a period, let's say that it's April as I answer this question. If the markets continue to be high, they continue to be strong, prices continue to be high, and we look at April and we're saying, "Okay, it's May, June, July, August, September, October.

Prices are still high. Maybe we're a little bit flat, a little bit high." In that situation, I'm happy because I'm still happy to stay focused on paying off the house. But knowing what I know about the benefits of investing over paying off the house, I would want to have that money sitting there.

And if we had some kind of dramatic market downturn, dramatic drop, some kind of dramatic correction, I would want to have that money still available to me to possibly pull over and say, "Let me go ahead and invest it." And if you had a 20% correction, something like that, 30% would be great.

I'd turn over there and I'd put the money in the market. I know that probably violates kind of the whole logic we just went through, but it's like pulling teeth for me. I can't admit, I can't say that it's better to pay off the house, even though in my gut I feel it.

I feel it and I want you to pay off the house. I really want it. But that's my struggle. It financially, it's just--I would pile up the money in an external account so I have access to it. And with this, I'll be done. Just a quick little comment. In your situation, you can stroke checks to the mortgage company and that will work because your timeline is so short.

But I've learned the hard way how not fun it is to not have liquid cash. What I encourage people to do is set aside the money in an account. And if it takes you a year and you want to make a big chunk, make sure that you're piling up $145,000 in a checking account and then stroke a check all at one time.

Because what I've learned the hard way is there's value to your having a high mortgage balance and a lot of money in the bank because then you have total liquidity. If you need to move, something happens in your plan, something changes, somebody gets laid off, I want you to have $50,000 in the bank.

If there's a 30% market downturn, I want you to have money to be able to pull over and buy stocks like crazy. You need to have money in the bank. And so you want to make sure that you keep the money liquid. There's also benefit in having a mortgage balance of zero because that takes risk out of your life.

If you have a mortgage balance of zero, you can always make that mortgage payment. You can drop your insurance if you need to on your house if you run out of money. With a mortgage balance of zero, you've got safety. And there's a real benefit in a mortgage balance of zero.

But during the whole in-between period from 145 to zero, there's no benefit. If your mortgage balance is $75,000, you've still got to make your $960 payment. And if you don't have money in the bank, it doesn't do you any good. You get laid off and you've got a mortgage balance of 75, it's not helpful because next month you've got to make that mortgage payment.

So what I would do is I would take a wait-and-see approach and I would watch the markets and I would watch my bank account. Work like crazy, pile the money up as quickly as possible, and decide more towards the end of the year. Remember, you can always make contributions to IRAs after the end of the year, and you can always make contributions to the 401(k) at the end of the year.

If you get to the point where in about, let's say, September or October, you decide, "No, we do want to go ahead and make 401(k) contributions," put 100% of your paycheck into the 401(k) in those last few months to get the contributions in there before the end of the tax year.

So that's kind of my approach. To summarize, the difference of what's better financially is primarily based upon what's the highest interest rate, and that's very minorly affected by the tax benefits of investing pre-tax dollars into a retirement account, and it's very, very minorly, and probably in your case not at all affected by the loss of a potential mortgage interest deduction.

But the big one, it's all about interest rate. If your investments return 7% and your mortgage is 4.5%, you're better off investing, period. We don't know when the 7% is coming. We don't know if it's going to come. If you're putting a lot of value in getting a guaranteed 4.5%, it's very hard to get a guaranteed 4.5% out there today.

I probably short-circuited that argument. Let me just amplify on it before I hit stop. It's very hard to find a 4.5% guaranteed return. So if you're one who is concerned about risk, if you're one who is a novice investor, you need to make that 4.5% guaranteed return will feel pretty good when you're in a debt-free house.

Financially, the arguments are all in favor of putting the money into your 401(k)s. If I woke up in your shoes, I think I'd be paying my house off with a goal of getting it done by my 30th birthday and then go all in on retirement investing at that point in time.

And if I'd be watching the markets, and if you get lucky enough to get some kind of 30% downturn, 40% downturn in the next couple years, don't miss that because you're paying off your house. If we get a big correction or a big recession that drives a big correction, don't miss that buying opportunity.

That's all I got. Today's show is brought to you by the patrons of the show, about 260 individual people, listening audience of Radical Personal Finance, about 17,000 to 20,000 people a day. And out of that, 260 of you send me money every month to say thank you. I want to say that not to shame you, I guess just a little bit, to say thank you to those of you who do.

I try to keep the show really packed with info and content, try to keep minimal advertising and keep the advertising really relevant, but I've worked to build it on the Patreon program. So if you'd like to support the show, if you think, "Hey, this is good, Joshua, we appreciate it," if this has been helpful to you and valuable to you, come on by and support the show at radicalpersonalfinance.com/patron.

You figure out how much money I make you and save you every month, give me 10% of that, radicalpersonalfinance.com/patron. This show is part of the Radical Life Media Network of podcasts and resources. Find out more at radicallifemedia.com. It began with a vision that from the majesty of this land could rise new possibilities.

That spark of an idea created something you have to see to believe, grand and exhilarating, an unparalleled entertainment experience. Today, the only thing missing is you. See for yourself. Suboba Casino Resort. Forces of nature. As old as time. Now, Suboba Casino Resort welcomes you to a world of exclusive rewards and privileges.

With new rewards and new heights. Introducing Sky by invitation only. Learn more at suboba.com. Find your element. Suboba Casino Resort.