I'm a big fan of debt-free living. Probably too big of a fan, actually. I know of at least one financial error I've made because of a general abhorrence of debt (can anyone say HPSP?) At this point in our lives we only have two debts. One is on an investment property (our last house.) I owe $91K at 5.3% (3.3% after tax) on that property. We refinanced into a 20 year loan when we moved out and we've been paying on that for a little over 4 years. We pay $300 a month extra on it, so we're probably 8 years away from paying it off if we held on to it. We probably won't have it paid off before we sell it. [Update prior to publication: It's now on the market.] Obviously, upon selling it, that debt will be gone. After transaction costs, we'll probably get $20-30K out of it and will need to decide at that point whether to put it toward our current mortgage or invest it.
We are 29 months into a 2.75% 15 year mortgage fixed mortgage on our residence. At this point, our loan to value is about 50% on the property. The payment is very affordable on our income, but it bothers me to have it. I would be making extra payments on it to get rid of it sooner if it wasn't so darn cheap. I mean, our marginal tax rate is 38% this year and the interest is completely deductible to us. So our after-tax rate is 1.7%. Given current inflation of ~ 2% right now, the mortgage is better than free on a mathematical basis. But it still bothers me for a few reasons, not all of which are completely logical.
Why I Want To Be Debt Free
First, I feel like I need to make hay while the sun shines. I still can't believe I get paid what I do to practice medicine. There are many pressures on physician incomes, and it would not surprise me to see my income decrease dramatically at some point during the remaining time on this mortgage.
Second, there is a very real risk of job loss for employee physicians. I'm not an employee, but with regard to job loss, my job isn't much more secure than an employee's would be. Like most hospital-based specialists, our group would essentially disband if we lost our contract with the hospital. Those contracts renew every couple of years but at this point in our lives, we'd rather not move if that contract were lost. We like where we live-the schools are great, we have family and friends here, and we love the area. But if our group were to lose its contract, it would be unlikely that I could easily find another full-time job in this area. However, if our expenses were low enough it would be relatively easy to pick up some prn (as-needed) work in this area, perhaps fly somewhere else to do a bit of locums for a few days a month, and combine it with the income from WCI to maintain our standard of living. Having a paid-off home gives us much more freedom to survive a serious job catastrophe.
Third, I don't plan on ever working more shifts or more night shifts than I'm working now. In fact, I'd like to cut back a bit already-both fewer shifts and definitely fewer of the overnight ones. After-tax, my mortgage payment represents about 2 shifts a month. If I paid the mortgage off, that's two shifts I wouldn't have to work without changing my “after-mortgage income” at all.
Fourth, we're starting to spend a lot more money on stuff we want (but don't necessairly need)-expensive vacations, optional house upgrades, fancier toys etc. Buying stuff we don't need while we still owe money on our house is an awful lot like buying stuff on credit.
Finally, as Dave Ramsey likes to say, a paid-off mortgage is a status symbol. I value it a lot more than driving an expensive car. I make a ton of money, why shouldn't I have a paid-off house? Mathematically am I giving something up by not keeping a low interest mortgage for decades? Probably, but it's nice to be in a position to not need to take that risk.
Finding a Balance
So I've been thinking a lot lately about how to balance my desire to be debt-free with the mathematical stupidity of paying off a mortgage with a negative real interest rate early. I think I've decided on a solution.
The Plan to Pay off the Mortgage
My current P&I payment is $2,445 per month. In order to pay the mortgage off in 5 years, I would need to increase that payment by $3,140 per month. If I instead invest extra money in a side account, I will still owe $202K of my current $313K balance after 60 months. So I need that side account to be equal to $200K. I'm going to have to invest quite a bit of money to get to that in just 5 years. This, of course, is all in addition to our other financial goals- retirement and college for the kids.
Step # 1 Invest a lot of money on the side each year
How much I need to invest really depends on what kind of a return I can get on the account. If all I can get is 1.7%, then it will require $3,140 per month, or about $38K per year. However, if I can manage 8% on it after-tax and expenses, and I front-load it a bit, it would be only $31,500. Even so, that's still a big chunk of money.
Step # 2 Add in windfalls
I could further lower the planned amount if I'm willing to add in any windfalls and “found money” I get in the next 5 years such as the equity we get out of our rental property when we sell it. There will probably also be other windfalls, including months when my pay is particularly high or when WCI does well.
Step # 3 Take significant risk
Obviously, in order to get 8% after taxes and expenses, I'm going to have to take on significant risk. I could probably get that kind of return out of Peer to Peer Loans, but those don't meet my requirement of being instantly liquid in order to pay off the mortgage. I could probably also get that out of a real estate investment, but that also suffers from a liquidity issue. I'm almost surely not going to get that return out of any kind of a mainstream fixed income investment. So that leaves equities.
Taking equity risk for a goal that is only five years out isn't the typical financial advice you hear out there. However, just as I do with my children's 529s, I also look at not only the likelihood of losing money, but also the consequences. What is the really bad thing that could happen if I use equities to fund this side account? The really bad thing would be that I've almost got my $200K and we hit a big bear market and that $200K is cut in half. What's the big deal? I can clearly afford the mortgage payments. Waiting a year or two (or ten) for the market to recover certainly wouldn't be a catastrophe, especially since I'm not even sure I would rather have the mortgage paid off than the side account. Sure, I'm investing “on margin” but there won't be any margin calls. As long as I can service the debt, I can just wait it out.
I suppose I could take even more risk by getting a home equity loan and investing the proceeds. However, not only does that increase my debt (what I'm trying to get rid of) but I also probably couldn't get anywhere near the terms I've got on my mortgage debt. Besides, I can't legally deduct the interest on more than $100K of that anyway, further increasing the effective interest rate.
Step # 4 Flush out the capital gains using my charitable contributions
8% after expenses and taxes is no easy goal in a taxable account. Not only will I need to use equities, but I may even need to use relatively risky equities, like emerging markets stocks, microcaps, or small value stocks. It is relatively easy to keep expenses low using ETFs and mutual funds from companies like Vanguard, but keeping taxes low in a taxable account can be tricky. However, I've got an advantage and I plan to use it.
I make sizable charitable donations each year. This provides me the opportunity to flush the capital gains right out of my portfolio. Let's say I put $25K into this account in year 1. It increases in value over the next year to $30K. If I were to sell that, I would owe capital gains taxes (18.8% LTCG rate for me) on that $5K, or about $1000. However, if I transfer those shares to charity, and then take the $30K in cash that I would otherwise use for a charitable contribution and buy more shares with it, then those gains are flushed right out. I've essentially reset my basis to $30K. Although I'll still have to pay annual taxes on any distributions, this will dramatically lower any taxes due. Even better, unlikely with tax loss harvesting, there are no wash-sale rules.
Step # 5 Tax loss harvesting
I can further increase the tax-efficiency of this account by tax-loss harvesting. Since I'll be using relatively risky equities, I will likely see quite a bit of volatility over the next 5 years. By exchanging shares with a loss for a highly correlated fund or ETF, I can book that loss and deduct $3K a year against my regular income (at 38%, that lowers my tax bill by $1,140 per year.) If I can book even more than $3K in losses per year, I can use those against the distributions, or even save them up for future years. Between donating appreciated shares and tax loss harvesting, it's even possible that the net effect of taxes on this account is positive. Tax loss harvesting isn't that useful for most people, because you're just delaying taxes to when the replacement investment is eventually sold for a gain. However, if you have a way to flush those gains out of the portfolio, tax-loss harvesting is a much better deal.
Getting out of debt isn't all about math, it's also about behavior. While 5 years isn't forever, it is still a long time to stay motivated to work toward a goal. So it would be a good idea to have a carrot hanging out there to provide the motivation. So here's my carrot- when my side fund equals the mortgage debt I'm going to drop the three overnight shifts I work each month. Trust me when I say I'm highly motivated to quit staying up all night 3 times a month. And I'm going to use your assistance, dear readers, in staying accountable by periodically posting about how I'm doing toward this goal. Perhaps others with low-interest mortgage or student loan debt and an interest in being debt-free might like to play along. Before you decide to do so, however, please give proper consideration to the three issues below.
Avoiding Being House-Poor
Paying off a mortgage early brings up the issue of having too much of your net worth tied up in your home. I saw a good rule of thumb recently that you should have twice as much in retirement savings as in home equity, and I think that's pretty reasonable. Paying off my mortgage today would probably drop me below that amount, but 5 years from now I should be well above that ratio.
What About Asset Protection?
There is also the issue of asset protection. In some states, your home equity is well-protected by homestead laws and “tenants by the entirety” titling. Unfortunately, Utah is not one of those states. My retirement accounts are well-protected here, but I'm already maxing those out. Any additional home equity I get will be no more protected from my creditors than a taxable account, so there's really no advantage one way or the other for me from an asset protection perspective. This might not be the case for you.
What Does Your Spouse Say About This Plan?
I decided to ask my wife what she thought about this crazy scheme. Here's what she said:
“You listen to Dave Ramsey too much. You just want to call in and scream that you're debt free.”
That is not true, but she thinks my concern that our income could dramatically drop and put us into financial difficulty due to the mortgage payment is an awfully small risk, especially given the side income from WCI, my disability insurance, and our sizable emergency fund. (She's right, of course.) But she reluctantly said,
“Okay, you can save up this side fund, but not if it delays doing some of the house improvements we've agreed upon. It doesn't seem that paying off a loan that is less than inflation should be our highest priority and you have to be willing to make other sacrifices if you really want to do it.”
Then she suggested that if we didn't buy this fancy new boat I've been eyeing [update: and recently purchased] that we would have two years worth of extra housing payments right there. Ouch. Nevertheless, we're keeping the goal. It should be an interesting study in personal finance (which is both personal, and finance) to see how we do toward it.
My First Report
So here's my first report on The Great Mortgage Pay-off Scheme:
- Month 2/60
- Outstanding Principal: $313,465.18
- Value of side account: $0
- Basis of side account: $0
- Positive or Negative taxes generated from account: $0
We're obviously not making much progress so far, but I'm confident we'll catch up!
What do you think? Do you plan to pay off your mortgage early? Why or why not? Do you have a low-interest debt dilemma? What do you plan to do about it? Would you like to play along and post your progress? Comment below!
Of our $2k (a low single digit percent of monthly income) payment, $750 represents taxes and insurance each month. So, I struggle with the same question and would like it paid off, but feel that the incremental $1300 per month is minuscule, and even if it is paid off I still have to write that $7300 check for taxes every year and pay $1700 for insurance, so I wouldn’t feel there are no financial commitments or payments.
We do bi-weekly payments and send them double every month, but have decided no to accelerate it much beyond that.
Interested to hear what others are thinking/doing
-Jon
Contract Diagnostics
I think this is a very interesting question. I, too, live in an area with very high property taxes, and pay about $1100 per month for taxes and insurance. We recently refinanced to a 15 year fixed mortgage with the plan to pay it off sooner, rather than later, but we would still have that $1100 (at least–it goes up every year) to pay no matter what, and wouldn’t be truly free of that “debt”.
Keep in mind the government is a lot slower to foreclose on your house than the bank.
Sounds like a great plan. In fact, being in a substantially similar situation I intend to co-opt most of it. Interestingly I think that if your plan proves to be successful, it will be more difficult to pull the trigger on the payoff in 5 years. More successful=more difficult.
You’re probably right. Of course, the more successful it is the better it would be to pull the trigger as it would mean equities had been doing well.
I like the side account idea. Its not hard to find rock solid companies that have dividends of rates greater than your after tax interest rate. I would load up the side account with some of these for stability/predictability (only div champ companies, non cyclical or undervalued currently). For a bit of possible added yield(risk) you could throw in a MLP or two.
Agree it may be hard to give it up once started…but again, thats a great problem to have.
I thought about this question quite a bit before deciding that it was worth it for me to prepay the mortgage. I agree wholeheartedly with your post and will pay off my mortgage in the next 3 years. I have been making extra quarterly payments to the principle for the last 5 years and will continue to do so until the end. My interest rate is low 3% but I don’t care. I split my leftover money about 2/3 towards investments and 1/3 toward the extra mortgage payments. So I feel like I’m still participating in the markets and hitting the mortgage hard. Being completely debt free has so many benefits – the freeing up of cash, the flexibility to reduce work or retire earlier, and the psychological security.
Debt free is great
No matter what I want my money working for me and psychologically it’s a wonderful feeling
Go for it with addl monthly principal payments
I think your plan is solid especially because you likely don’t NEED the money in the side account. This sounds like something I would do actually. But I’m a renter while I’m still in the military and I am trying to save up money to be able to pay for my eventual retirement place with cash.
I read this and wondered how much you might benefit from making payments every 2 weeks, or if it is easy to do electronically, weekly payments. I’ve done weekly loan payments on my large amount of student loan debt ( I am paid weekly by my locums company) and I do think it made it much easier both mathematically and mentally.
That makes sense if you’re paid weekly or biweekly. I’m paid monthly with no paycheck in January and two in December. Writing a check every week would just add a bunch of hassle to my life.
A CEO who failed to manage and optimize low interest debt would be fired.
There are very few inflation hedges out there; a fixed rate, long term mortgage is one of them. You have to live somewhere.
A UCC loan (i.e. a mortgage) is always superior to an unsecured creditor. A large mortgage is recommended by every asset protection attorney I have ever read. As long as you make the payments, the Bank cannot take this property away from you.
In twenty years would you rather have 300K in a taxable account kicking off dividends at 15% tax (maybe cap gains potentially at 0% tax)or a paid off mortgage?
Dave Ramsey is for people who live paycheck to paycheck. The Whitecoatinvestor has much more financial discipline than that.
Asset protection wise it only makes sense to have a large mortgage if 1) Home equity isn’t protected in your state and 2) you’ve taken the money that would be in the home equity and moved it to something protected like a 401(K) or cash value life insurance.
20 years from now, when I’m turning 60 and have likely been retired for a bit already, I’d rather have the paid off mortgage. Unless I take out another mortgage/home equity loan or move, I’ll have a paid off mortgage in 12 years.
I’m interested to see WCI’s response to this. It sounds to me that his decision is more emotional than logical, and since he recognizes that, he can live with the extra lost income. Be interesting to put a price-tag on it, though.
We paid off our 15 year mortgage 5 years early and are hitting our 3 kids 529 accounts hard. Along with other investments, we will be financially independent in 5 years when our last kid goes off to college. This will allow us to move to an area with lower taxes (our small boutique suburb with great public schools comes with a high tax rate), and to either change jobs, retire early, or semi-retire. While being debt free may not make mathematical sense, the feeling is priceless.
Jim, our home loans situations are eerily similar: We’re 29 payments into a 15yr 3% mortgage with P&I $2,500 and principal $318K. WCI has been the primer for my financial education and I would very much like to follow you down this 5yr payoff path.
Please provide instructions on how you accomplish your maneuvers along the way, that really helps someone like me. Your blog helped me get past the intimidation of opening an Individual 401K, doing yearly Backdoor Roths, and investing our yearly HSA money. Still haven’t conquered the tax loss harvesting piece but looking forward to figuring it out.
Thanks for all you do, I hope to buy you dinner some day…
I like Thai.
I mean, our marginal tax rate is 38% this year and the interest is completely deductible to us. So our after-tax rate is 1.7%.
can you explain these calculations?
Sure. Federal tax bracket = 33%. State tax bracket = 5%. Total tax bracket = 38%. Mortgage rate 2.75%. So….
2.75% * (1-38%) = 1.7%
Shouldn’t you be using effective tax rate in this calculation, not marginal?
No, I believe marginal is correct because it’s a decision I’m making “at the margin.”
Does this formula for mortgage interest still apply with the deduction phase out limits that are now in place for high income earners?
No, you have to make an adjustment there if that applies to you. But very little of my deductions get phased out. It’s a pretty minor effect. The loss of exemptions, however, really hits hard very quickly.
I’m in a similar boat. I have a very large mortgage (still less than 1X my salary, built the house before finding this site) but after tax payments are about 2%. I think I’m going to invest my extra cash instead of paying this off. I need to ramp up my retirement accounts while I can. It’s a lot of debt but payments aren’t an issue and I’d rather have an inflation hedge over the long term. Might make a bit extra payments, but we’ll see.
Our numbers are very similar, so I am intending to read, learn and play along. 🙂
And I think doing that debt-free scream would feel pretty great….
Usually you make a lot of sense, but not this time. Agree with your wife on this one. If I were really concerned about job loss I’d want as much cash in the bank as possible, not tied up in home equity.
That makes sense if the plan in the event of job loss is to get another job. If the plan is to retire, then reducing expenses might matter more.
I had a similar thought – aren’t you discounting the likelihood of being able to replace all or most of your income within a year or so, in the event of a job loss?
Why would I need to replace all of my income when I spend a third of it? All I need to do is cover my expenses, and I can do that with this website, especially if you take away the mortgage payment.
Don’t forget that itemized deductions phase out after you get to a certain income level so some mortgage interest & charitable donations may not be deductible depending on your income level.
Chris
Have to agree with Mark and Jeff. Managing debt is just as important as investing itself. First step to managing mortgage debt is to not spend more on a house than you can afford (but you need to live a little and this does not need to be just a financial decision – see your post loosening the purse strings). Second is balancing return on investments. A home mortgage can allow you to leverage home equity to invest in more lucrative options. As pointed out, it would be much better to continue to earn 8% on $200K in 5 years than paying off your mortgage. In finance, you can’t let your emotions cloud sound judgement. I hope we don’t see a post in the future about selling a total market index fund to invest in a bank CD since interest rates have recovered to 1.7%.
Let’s quantify “much better.”
$200K * 8% = $16K. Actually, there will be a bit of tax drag. Let’s call it $15K initially, and unless I flush the capital gains out through charitable donations, as little as $12K. The mortgage options says $200K * 1.7%, or $3.4K after tax. So we’re talking about $8600 that first year, with a decreasing amount each of the following 6 years. So at best, assuming I actually pull off 8% returns, we’re talking about perhaps $25-40K. And that isn’t risk adjusted. I wouldn’t call that “much better.” I’d call it, “a little better.” Also, keep in mind this scheme gives me the decision in 5 years of whether to pay it or or continue to invest on margin. That decision hasn’t been made and doesn’t have to be made for years.
Jim, I’m totally with the same boat though a few years back. I think the problem with people just assuming 8% return is that risk is never in their calculations. I’m not just talking about variance but more about calculating outcomes. For example calculating that you had a 70% chance of getting an 8% return and a 30% of 2% return, would mean your overall rate of return is 6.2%. People only calculate the positive. And the calculation I just made is for someone who is risk neutral and clearly behavioral economics has shown that people are risk averse. So I agree with you completely. Great post as well.
Your post seems to make total sense Rob. However from other posts WCI has said that his (and his wife’s) intention is to not just pile up money for the sake of it, and that if he really wanted to he could stop saving today if he really wanted. At some point does the psychological benefit of his plan trump the purely logical/numbers based? At what point does one have the luxury to do that? Rhetorical questions, but something to consider…
Completely agree with the comments above about this being a poor financial decision, but the idea of a paid-off mortgage as a status symbol resonates. Heck, if everything else is fully funded, why not start paying off debt?! As Marks says above it’d be nice to have $300k spitting off dividends in 20 years; then again, I could argue that it’d also be nice having no rent or mortgage payments.
I am doing a similar plan, except for every dollar going into a dedicated taxable fund, an extra dollar goes to the mortgage; it’s nice also seeing that mortgage number dropping. Vanguard has a tax-managed small cap fund; if it becomes an issue they have a regular version too that can be used to tax-loss harvest. Will make sure that most of it is long-term, then sell in 3-4 blocks over a year to finish the mortgage if the market is cooperative. As a reward, I also plan to cut back on shifts, decrease disability coverage, and of course open an expensive bottle of whisky (another poor financial decision).
My thoughts: Once you’ve paid your bills and have your insurance, retirement account, and kids’ 529 on automatic withdrawal, the rest of your money is for luxuries. For some, those luxuries are boats, cars, furniture, vacations. For me, it would be a great luxury to be debt free. I don’t have to make the smartest financial decision/inflation hedge, etc. That’s what my retirement account is for. Whether someone goes WCI’s plan or pays straight into their mortgage, if that’s what you want to spend your extra money on, awesome.
Spent a lot of time very recently on the exact same calculation.
Except that I only owe about 88K on my home and could write a check this afternoon to pay it off with money well over and above a 12 mo. emergency fund.
same interest rate as well… 1.7% effective rate.
Ultimately decided that if I didn’t think i could beat that investing that there must be something wrong with me.
Decided to buy about 40K worth of Oil via an ETF when it really bottomed out here lately.
It made 30% in 5 days. Sold and am enjoying my profits.
Hey WCI,
Curious about your reasons for selling your rental property. From your other posts, it seemed this was a good investment property. Maybe you are writing a post about this….
I don’t know that it’s ever been good. Has it been acceptable? At times. But it’s also 10 states away.
And my renter is leaving. And I fired the property manager, which boosted returns and made management with a tenant in place easier, but makes replacing said tenant much more difficult.
Hard to argue with your choice to defer payment of debt at 1.7%APR after tax. I faced a similar decision recently on my 2.25%APR (fixed rate) student loans, which I had chosen to pay down slowly for years on the theory that I was making more than 2.25% in the market. I finally decided to pre-pay the entire debt last month after comparing the interest rate I was paying (2.25%) to the after-tax rate I was actually earning on the fixed-income investments in my taxable account (1.7%). Basically, I was earning negative spread income. So I liquidated a portion of those fixed-income investments to pay off the debt. Of course, much depends on what else one would do with the money if it were not directed at paying down debt. In my case, the money was sitting in bonds paying 1.7% — not equities, as in your case. Time will tell whether the decision pays off (no pun intended), but I will sleep well regardless.
I had a similar conversation with my wife last year. We are only about 6 months into a 7 year ARM mortgage at 3.375% which is about a 2% effective rate. We decided to place our money in a taxable brokerage account that is titled ‘tenants by the entirety’ which affords asset protection in Florida. Our goal is to have enough in the brokerage account to pay off the mortgage in full once it is time for the rate to adjust. This is not what Dave Ramsey would recommend but we feel that the market should return more than 2% per year over the next 6.5 years. The strategy I’ve used so far for the brokerage account is to put 100% into the Vanguard Total Stock market index fund.
I wish I could slap a tenants by the entirety designation on a brokerage account in my state.
This is something I’ve never heard of for brokerage accounts. My state allows this for home ownership. Would anyone please advise where I can look up which states allow “tenants by entirety” for taxable accounts? I’ve been blessed with a job I like, but cursed with its poor tax-advantaged retirement account options (and I did not know to evaluate benefits prior to getting this job). As a result, half of my investment contributions are going into a non-asset protected brokerage account. It would be nice if “tenants by entirety” was an option.
I assume the list looks just like the list for titling your house as tenants by the entirety. Best to consult with an asset protection attorney in your state to be sure.
found this: http://www.assetprotectionattorneys.com/documents/TBE.pdf
not sure how recent it is, but it may be a starting point for someone considering TBE for real estate or other assets.
Does it have to be an all or nothing decision? Can this be a flexible 5 year plan, i.e. – “a balanced 50/50 or 60/40 gameplan of side account / payoff the mortgage early? We’re 6 years into a bull market and if you listen to the likes of Peter Schiff’s out there, this bubble is going to burst at some point. May not be this month or next or even this year or next. But when it does bottom out, there will not be an 8% market return for a side account any more, and that guaranteed 3% from paying the mortgage early at that point, will make quite a lucrative return from both an emotional and financial standpoint.
It wouldn’t surprise me if there is a bear market and a recovery over this 5 year period. If it’s still in the depths of the bear 5 years from now, nothing is forcing me to sell and pay off the mortgage.
Debt free but the house.. max out everything 401, 457, roth, and solo 401k. Knowing that we are currently in a very long bull market… wouldn’t it be more reasonable to pay extra on the mortgage now and/or build cash reserves until the bear market comes and then switch gears… stop the extra mortgage payments, invest in taxable accounts buying cheaper stocks/mutual funds while its a fire-sale with everyone selling… and then… ride that wave right back up?! Unless we believe the currents trends are indefinite, My rate of return from now to the bear market is predictably low or negative… ? I sincerely hope the markets tank again soon…
I don’t know. My crystal ball is always so cloudy.
If we were to look at the current SP500 or Nasdaq “crystal ball”… I’d say now would be a nice time to invest monthly surplus funds into the market instead of paying extra to the mortgage principal? If I had invested over the past 6-8 months… and looked at my rate of return from then to now… wouldn’t I be in the negative? But instead.. I think I was better off saving those real mortgage interest dollars? Hopefully the market continues to crash/tank… which is easy for me to say as Im in my mid 30s.. and every month, a decision is made to either pay down the mortgage principal or invest roughly $10k monthly surplus… in addition to our routine 20% of gross investment into retirement accounts (debt free but the house, max every personal and business retirement account). Then continue to ride the wave down and back up again until we’re back to pre-crash baseline… i.e. nasdaq peak of 18000s. Then at that point consider switching back to paying down the mortgage principal and wait for the next market decline?
I understand that timing the market is not a good idea.. correct me if Im misunderstanding this… but thats IF I was planning to sell at any point? In this situation.. its deciding what to do with surplus dollars that I don’t need for 30+ years. Plus.. I live in litigious Florida.. asset protection should also be a consideration. So in addition to interest dollars save.. Homestead is very nice in protecting my number one asset.. but my current although cloudy crystal ball gives me the impression that the benefit of market investing probably outweighs the risk of not paying off the mortgage sooner…
Crystal ball so cloudy…predicting the future so difficult.
Here’s the way I think about it. Putting money in the market is a good thing. Paying down the mortgage is a good thing. There really is no bad choice there. If unsure what to do, split the difference.
And no, I don’t listen to the likes of Peter Schiff or anyone else who has a cloudy crystal ball.
Being debt free is awesome. I can make great financial arguments (such as I’m not paying the 10k per year in interest that I used to pay or that a house is not an investment but a liability/consumption item, etc.) but the real value is the psychological benefit of truly owning a property that will not be reclaimed by a financing agency if you stop payments. We paid off our house I think in 2003 so I would have been 36 years old. I bet a hundred people told me I was being stupid or ignorant but I think I got the last laugh on that one. I have done wonderful things with all of the extra cash flow over the last decade. Robert Kiyosaki got this one right: the mortgage is an asset but not your asset (it is an asset for the bank).
Is there an advantage to washing out capital gains with charitable contributions vs using the charitable donation as a tax deduction? It seems like using the charitable donation at the higher marginal rate is better than taking it at the capital gains tax rate?
Not sure if I understood you correctly, but you can still use the donations of stocks as a tax deduction for charitable contribution. The advantage of giving stocks instead of cash is that you don’t have to pay capital gains on the appreciate stock. Basically you have the option of either say giving $10k in cask or $10k in stocks.
https://www.fidelity.com/viewpoints/personal-finance/charitable-tax-strategies
I struggle with the same choice. Have worked out the math to finish paying our mortgage 7 years early; about the same time my son should start college. Since I’ve would have only been paying into his 529 for 10 years when he graduates, it hasn’t had much time to compound. This will allow me to turn my mortgage payment into college payment.