Save LOTS of Money in the Long Run

[simpleyme]

you see Disney Steve that's why I lurk around boards like this;-)

I have paid off all the obvious things maxed out 401k,have Cd's savings accounts , a Ira with my bank and we blindly invest money with Edward Jones always have ,now that I will soon have an additional amount ,my mortgage payment ,I am trying to figure what to do with the additional 1500 we will have to invest that we do not need

we also have a portfolio that is easily 4 x our mortgage hah that's easy when you pay down your mortgage LOL we only owe 75K on this mortgage

the funny thing is with simple minded investing we actual have quite a bit so my thought is to slowly learn what the hell I am doing and when that1550 frees up invest it aggressively since all my safe investments are maxed out and I feel pretty secure

[jIM_Ohio]

you see Disney Steve that's why I lurk around boards like this;-)

I have paid off all the obvious things maxed out 401k,have Cd's savings accounts , a Ira with my bank and we blindly invest money with Edward Jones always have ,now that I will soon have an additional amount ,my mortgage payment ,I am trying to figure what to do with the additional 1500 we will have to invest that we do not need

we also have a portfolio that is easily 4 x our mortgage hah that's easy when you pay down your mortgage LOL we only owe 75K on this mortgage

the funny thing is with simple minded investing we actual have quite a bit so my thought is to slowly learn what the hell I am doing and when that1550 frees up invest it aggressively since all my safe investments are maxed out and I feel pretty secure

How long could you invest the $1500/month? Is this something for only a year or two, or do you have 10-15 years to retire?

If you are "behind" in retirement savings, I would look to use the $1500/month to do 2-3 things

1) max out 401ks/IRAs/HSAs (including catch up if over age 55 to 401k and IRA)
2) purchase long term care insurance
3) create a taxable account. I am partial to dividend paying stocks in taxable accounts. Others here will have other ideas.

[InDebtInDC]

This is a horrible situation to consider, but what happens if your house is totaled and you are underinsured, or if your insurance carrier refuses to pay?

[simpleyme]

How long could you invest the $1500/month? Is this something for only a year or two, or do you have 10-15 years to retire?

If you are "behind" in retirement savings, I would look to use the $1500/month to do 2-3 things

1) max out 401ks/IRAs/HSAs (including catch up if over age 55 to 401k and IRA)
2) purchase long term care insurance
3) create a taxable account. I am partial to dividend paying stocks in taxable accounts. Others here will have other ideas.

I am 35 so I will have 20 years till retirement

I have investments with Edward Jones are those the taxable account you are talking about, basically anything not considered retirement?

I am not going to purchase long term care insurance until I am at least 55 DR recommends it at 60

HSA maybe I don understand these but aren't you suppose to only fund what you will use in a year?

thanks for the input

[jIM_Ohio]

I am 35 so I will have 20 years till retirement

I have investments with Edward Jones are those the taxable account you are talking about, basically anything not considered retirement?

I am not going to purchase long term care insurance until I am at least 55 DR recommends it at 60

HSA maybe I don understand these but aren't you suppose to only fund what you will use in a year?

thanks for the input

20 years of saving $18k per year will be a good way to set up retirement. Your emphasis should be tax efficiency.

401k max is $15,500 per year.
Roth IRA max is $4000 for 2007, $5000 for 2008
HSA is another way to save (Healthcare spending account). If you use an HDHP (High Deducable Health Plan), then you can submit around $4200 to HSA each year. This can be invested and does not have to be used each year- this money could even be used for long term care.

[simpleyme]

This is a horrible situation to consider, but what happens if your house is totaled and you are underinsured, or if your insurance carrier refuses to pay?

I am not sure I understand this question

If your house burns down and insurance won't pay do you think you do not have to pay the house off anyway?

this is another reason to pay off your home ,I heard of people (on the news) who could no longer get insurance or their insurance would not pay from hurricane Katrina
did you know that if you own your home you get to decide whether or not you have insurance, not the bank?
so instead of being screwed because you cannot pay the unbelievable rates required by your bank and lose your house you could (gasp) choose to risk not having it at all

I personally carry insurance but there are always thing insurance wont cover

pay off your house stock pile cash and you are self insured

[simpleyme]

20 years of saving $18k per year will be a good way to set up retirement. Your emphasis should be tax efficiency.

401k max is $15,500 per year.
Roth IRA max is $4000 for 2007, $5000 for 2008
HSA is another way to save (Healthcare spending account). If you use an HDHP (High Deducable Health Plan), then you can submit around $4200 to HSA each year. This can be invested and does not have to be used each year- this money could even be used for long term care.

I did not know that about the HSA I will look into that maybe start it this year or next ;-)

[lgslgs]

did you know that if you own your home you get to decide whether or not you have insurance, not the bank?
so instead of being screwed because you cannot pay the unbelievable rates required by your bank and lose your house you could (gasp) choose to risk not having it at all

I personally carry insurance but there are always thing insurance wont cover

pay off your house stock pile cash and you are self insured

Actually, our plan is to stockpile cash, pay off the home on schedule, and self insure except for liability coverage once the mortgage is gone. By not paying off the mortgage now our cash stockpile grows bigger and leaves us financially prepared to drop our insurance in 2032.

Depending on our investment growth, we may even decide to pay off our mortgage early for the purpose of dropping insurance. That decision will be based on insurance cost and on our future building plans. Being rural, our long terms plans involve having more outbuildings and more of our property's structural value spread among multiple buildings. Our construction choices will be non traditional (fire proof block barn construction, alternative fuel, power and water set up, etc.) which will make us fit in less with insurance companies cookie cutter view of the world. We'll also be set up so that if the house burns we'll have several other living quarters available while we rebuild the current house into something more disaster proof.

All of this takes money, and with virtually no other income than investment returns we'd jeopardize our ability to make it happen by recklessly paying off our mortgage too early.

Lynda

[simpleyme]

sounds like a good plan Lynda ;-)

true that ,if all you have is a paid off house and nothing else can leave you poor
paid off house and no cash is a bad plan ( except you own the house can sell it and have cash ,but non-paid for house again LOL )

[xdork4lifex]

Xdork,

I sure hope you aren't living anywhere NEAR Vancouver or Vancouver Island (as I do). We are due for a HUGE housing correction and condos will be the first to go (they always are - trust me). Real estate is hugely overpriced here right now. I would seriously get out while you still can if you are living in one of these bubble areas. Edmonton and Calgary have already started on the way down. This is going to be UGLY (especially in Vancouver), and no the Olympics won't make one bit of difference. It never has for any other city, and it won't here.

If you are in the Toronto area or somewhere else, I don't know as much about those places so I cannot comment on them. If you are on the West coast like me, please consider getting out while you are ahead. It won't be pretty here for a long time after all this shakes out.

Hey Debbie!
Thank you for the reply. I'm actually in Toronto, so we haven't had the boom that you have had on the west coast. I can't even imagine spending so much for a condo in Vancouver. I think it's a beautiful city, but definitely overpriced.

Honestly, I don't even really think of my condo as a financial investment. I just like the thought of having a place close to all of my friends and family. I'm planning to move to Washington state when I am done with school, but I would like to hold onto my place just so I can always have the option of moving back relatively easily.

Do you own a place in BC?

[xdork4lifex]

you need to compare the 69k in interest saved compared to the amount you would have is $250 were invested every month, earning a "8%", return. $236,000 by my calculation.

House will appreciate regardless (both situations).
Does not take into account taxes (mortgage interest is tax deductable on long form, investment earnings might be taxable).

In 25 years you have the same equity in the house regardless, so the question is did you want to save 69k and improve cash flow, or have more money in bank on the 25th year.

There is a middle choice of invest until amount equals mortgage payoff, then payoff, then invest previous mortgage payment. More conservative than just investing the difference, more aggressive than just paying down debt.

Thank you for the reply! Yeah, that makes a lot of sense. Sadly, I don't know very much about investing, so I just feel more comfortable having a rental while I'm in school so I can continue to sleep at night LOL. Is there anything in particular that you would recommend investing in?

[avengerki]

Ok I have to admit I am new to being a homeowner. Here is my thought on why you should pay the principal off early. Once it is paid off you still have the mortgage payment for investing now. If you were to lose your job that emergency fund you have will be able to last longer as your monthly expenses are at a much lower level, and if needed you can get a loan against the equity in your home.

I'm only asking because this is one argument topic that never makes sense to me. Sure you aren't getting the most short term return on your money as with other investment options. I guess my real thought is which is greater the compounded interest on the smaller amount you invest each month for the life of the mortgage, or the mortgage amount invested for the difference in that life. At least if I did the math right $250 a month invested over a 30 year period with a 9% apr yields 445,000. But if you could use that $250 to pay off your mortgage in half the time then turn the entire mortgage payment (assuming $1500 month mortgage) into investment with the same 9% apr yields roughly 576,000. and if you actually include the $250 overpayment each month I get 672,000. this would be at the end point of 30 years.

Please tell me if my math is wrong but I tend to look at the long picture not just the short term.

[Scanner]

Good point on needing to reduce your emergency savings if you lose your job and you have your house paid off (in NJ, you still owe $8000/year in taxes though even if your house is paid off and in the clear).

There are people on this forum who probably should have $30,000 in savings because their household expense is $5000/month. That has to be earning 2-3%, after taxes.

If your house is paid off, you could probably free up some of that and deploy it into longer term investments.

This is kind of a repeat weird subject and one of those subjects that a case could be made either way.

It's a crapshoot.

Sure. . .I see DisneySteve, LivingLarge, JimOhio et als point about investing for the long term yadda, yadda, yadda, $250/month @ 7% beats prepaying mortgage.

What I think they forget is that often people move/change jobs.

I am thinking of myself at this point. There is a chance I could be moving (about a 30% chance at this point)

I got a 25 year mortgage on my current house and haven't prepaid anything (although I equity accelerated). I probably have 18 years left on my mortgage right now with 66% equity in our house.

Well, if I move, I am going to have to start all over again on the amortization tables.

That means more interest up front, even if I take a 20 year or 15 year mortgage when and if I move.

What about the average person who moves 2-3 times over the lifetime of their career?

If I had our house paid off, I wouldn't have to worry about it. Maybe I should have prepaid it instead of investing. . .it may have been the wiser choice.

My suggestion is for a person to take their age, subtract it by 120 (let's say you are 40) and that should be into "traditional retirement savings" (Roths, 401(k)'s).

Use the remainder to pay down the mortgage.

I should follow my own advice.

Sure, if you are going to sit on the same job and the same house for 40 years (sounds like DisneySteve will), then it probably makes sense to go ahead and play the market.

[lgslgs]

Ok I have to admit I am new to being a homeowner. Here is my thought on why you should pay the principal off early. Once it is paid off you still have the mortgage payment for investing now. If you were to lose your job that emergency fund you have will be able to last longer as your monthly expenses are at a much lower level, and if needed you can get a loan against the equity in your home.

I'm only asking because this is one argument topic that never makes sense to me. Sure you aren't getting the most short term return on your money as with other investment options. I guess my real thought is which is greater the compounded interest on the smaller amount you invest each month for the life of the mortgage, or the mortgage amount invested for the difference in that life. At least if I did the math right $250 a month invested over a 30 year period with a 9% apr yields 445,000. But if you could use that $250 to pay off your mortgage in half the time then turn the entire mortgage payment (assuming $1500 month mortgage) into investment with the same 9% apr yields roughly 576,000. and if you actually include the $250 overpayment each month I get 672,000. this would be at the end point of 30 years.

Please tell me if my math is wrong but I tend to look at the long picture not just the short term.

Your math is wrong.

If your mortgage payment is 1500 per month, 30 year mortgage, figure 6% interest - $250 per month more doesn't take 15 years of your loan. It takes off nine years.

If you start saving $1500 per month after the mortgage is paid, and get 9% growth, you'll have $250,087 - not the numbers you calculated.

For handy calculation fun, try these:

What's Missing Calculator

Invest vs. Payoff

Savings Calculator - Savings Interest Calculator: A.G. Edwards Savings Calculator



One other thing - As you do your calcs be sure to do them with the real loan payment amount. Don't include tax or insurance escrow payments if you have them.

Lynda

[MonkeyMama]

Ok I have to admit I am new to being a homeowner. Here is my thought on why you should pay the principal off early. Once it is paid off you still have the mortgage payment for investing now. If you were to lose your job that emergency fund you have will be able to last longer as your monthly expenses are at a much lower level, and if needed you can get a loan against the equity in your home.

I'm only asking because this is one argument topic that never makes sense to me. Sure you aren't getting the most short term return on your money as with other investment options. I guess my real thought is which is greater the compounded interest on the smaller amount you invest each month for the life of the mortgage, or the mortgage amount invested for the difference in that life. At least if I did the math right $250 a month invested over a 30 year period with a 9% apr yields 445,000. But if you could use that $250 to pay off your mortgage in half the time then turn the entire mortgage payment (assuming $1500 month mortgage) into investment with the same 9% apr yields roughly 576,000. and if you actually include the $250 overpayment each month I get 672,000. this would be at the end point of 30 years.

Please tell me if my math is wrong but I tend to look at the long picture not just the short term.

I am not sure about that math. As a general rule, you usually save more in the long run by saving the difference, than you do saving your mortgage payment (+difference) once the mortgage is paid. I am sure there are some exceptions though. Maybe it makes more sense in your case.

In my case I am lost on your argument, because of the math I have heard, because I can save up so much money in the interim. So in the meantime I am building off wealth while I pay off my mortgage at a normal rate anyway. Paying the mortgage faster puts me behind as a whole. That doesn't make any sense to me.

Plus the money I invest I can fall back on in an emergency fund. I don't see how a lot of cash in my house helps me. If I invest $3k/year, then I have some decent funds to access in a true emergency. I am quite conservative and prefer to have more cash and investments than a lower mortgage balance. A lower mortgage balance doesn't help me in the short-term, say, if I lost my job. I have 25 years on my mortgage, and maybe 15 if I prepaid. But that is 15 years of extra financial risk until I free up my mortgage. (Sure it's great once the mortgage is paid - but by then if I didn't prepay my mortgage, the payment would be so cheap anyway with inflation!)

Just to be clear, in my #s, I put every dime into my ROTH. This skews the numbers considerably. I will never pay a dime of tax on that money, once it is invested. So it grows tax-free. That beats the mortgage by a mile.

This is one of those things though where no one size fits all. I think being young, having a lot of equity, and being in a HOCL area, it makes no sense to prepay our mortgage. My biggest problem with it is it puts all our eggs in one basket (we already put a lot down on our house AND have oodles of equity). & plus, when you are young, you can't ignore the power of compounding. In the case of ROTHs, tax-free compounding!