Debt reduction/payoff.

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One thing that many are missing is "Diversify Investment". All the money that a person have is in the house is not very good investment.

Yes, many Californian have large portion of their money tied in their houses because of good appreciation the last 10-20 years, but have some funds in other investments such as bond, stocks ... is much safer.

Example, I'm paying $3xx,xxx mortgage on my house worth $1.3-1.4 mills(it was about $1.5-1.6 mills in 2006-2007) I could pay it off with other funds some years ago but I didn't because I don't want to have all my money in the house. Have a mortgage or not my house will increase/decrease in value the same.
 
Kudos to you sir!

I'm in that process now, just not that huge. I picked up a little bit of debt in buying our house. Our mortgage is pretty affordable, so I am able to chase down those other bills.

Now, I'd love to be debt free, but with kids, it's not going to happen. I just want mine on a very low level.....
 
Originally Posted By: JHZR2
Nobody says it isnt. Its a matter again of how much in the first few years you have in the investment account versus the debt. If you have a non-trivial amount to invest, then you could pay the mortgage off MUCH faster and have a lot to invest with ZERO debt risk. If you have only a little, then you can get 6 or even 12% return, but the amount you are "earning" versus how much you are accruing and paying in interest (especially in the early years) is a huge delta.

And again, youre completely ignoring human nature and risk.


So you'd rather pay down your mortgage than build up your 401k?
 
Hard to argue with what might happen due to human nature. I would agree it's about discipline (in either scenario) - though I would believe if someone is intent enough to diligently pay extra towards their mortgage, they can work out a system where they diligently invest their money and don't touch it.

In the same token, if someone pays extra to their mortgage today, hopefully I have the discipline to not run out in 10 years and start up an equity loan. they also need to be disciplined to pay that extra amount next month too.

I'm not sure where it became a handwaving argument about chasing higher yields - I picked 6% because IMO it was a fairly reasonable return, looking at a long term yield. Under 6% return is fairly rare looking at the long term yield even with only a 20 year window on the investment.

If one thinks they are going to go out and invest their money and that investment is going to yield less than whatever the mortgage rate is by all means it's a bad call to invest the money.
 
Just received a Wells Fargo dividend that works out to 2.6% of current stock market value. Compared to what I paid for the stock it's 4.4%.

Since the most recent crash you'd be crazy to have been out of the market.

That one investment alone has returned more than the interest payable on a 25 year mortgage in a few years.
 
Originally Posted By: TrevorS
Originally Posted By: JHZR2
Nobody says it isnt. Its a matter again of how much in the first few years you have in the investment account versus the debt. If you have a non-trivial amount to invest, then you could pay the mortgage off MUCH faster and have a lot to invest with ZERO debt risk. If you have only a little, then you can get 6 or even 12% return, but the amount you are "earning" versus how much you are accruing and paying in interest (especially in the early years) is a huge delta.

And again, youre completely ignoring human nature and risk.


So you'd rather pay down your mortgage than build up your 401k?


I certainly would.

A paid for home, in most states (certainly mine) is beyond the reach of creditors, while it's owners are alive, because of the homestead exemption. In some states (TX, as I recall), even some paid for business assets can be homesteaded.

A home, in common with all real property, has utility or innate value. It's utility to the owner is independent of market price variations - it can always be a home, a farm can always be a farm, as another example.

A 401(K) is paper. It's utility ( other than tax ) or innate value is zero - without a buyer for it's contents, it's not even worth the paper it's printed on. You can't live in it, eat it, or rent it out. Really, what good is it?
 
If you have 401(K) or rollover IRA with some company like Fidelity, you are as safe as invest in US Bond. If Fidelity with managed assets in Trillions dollars failed then nothing is safe, even the house value at that time will worth nothing because nobody has money to buy anything.
 
I can borrow against my 401k and the "interest" I pay goes back to me.

I've never done it but look at the flexibility.

In one scenario, you emotionally attach value to owning your home at the cost of having no savings. If something comes up and you need money, you'll have to borrow it at market rates.

In another, you see the numbers as just numbers. Your net wealth is unaffected, indeed it can be improved just by how you take advantage of tax law. And you have access to cashflow if you need it.

Also consider how much you make if you set yourself a moderately aggressive 401k contribution. First advantage is that its pre tax and it grows free of tax. Choose a mutual fund that is very conservative with high income. You'll get up to 4% tax free to reinvest, some capital growth with little risk, all on pre tax dollars. Your company may even match your contributions. Meanwhile, the effective interest rate on your mortgage is near 3%.

So $10k a year in your 401k grows at say 5% a year if you're being conservative in your fund choice. After 25 years you have $501k.

Diverting that income to mortgage payments turns $10k into $8k or less when you receive it. After 25 years at an interest rate of 3.5% it would be worth $323k.

Having an extra $178k in savings is not a small amount. $50k of this is simply because you didn't pay 20% tax on $10k before you started saving it.
 
Originally Posted By: artificialist
Anybody a fan of Dave Ramsey?



Heck no, Dave Ramsey provides good advice for the alcoholics of finance.

I subscribe to the theory, "don't work for money, make your money work for you." Or as Kevin O'Leary says, think of your dollars as soldiers. Every day you want them to go out and capture as many enemy soldiers as possible and bring them back. I'll add you don't want to kill them in bad fights, ie buying consumer products or cars with them if at all possible.

For most people his advice is OK, but it will never get you anywhere.
 
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Originally Posted By: TrevorS
I can borrow against my 401k and the "interest" I pay goes back to me.

I've never done it but look at the flexibility.

In one scenario, you emotionally attach value to owning your home at the cost of having no savings. If something comes up and you need money, you'll have to borrow it at market rates.

In another, you see the numbers as just numbers. Your net wealth is unaffected, indeed it can be improved just by how you take advantage of tax law. And you have access to cashflow if you need it.


I can only speak for myself, but I don't attach much emotional value to owning my dwelling(s) - I attach emotional value to my spouse and child that reside in the dwelling.

There are many people that are good with arithmetic, and can model the numbers, and make them look attractive. This is basic human nature - the lure of something for nothing. After every economic downturn or upheaval, there's an easy place to find lots of them. They call it United States Bankruptcy Court. They just weren't very good at modeling the future. And the "net" part of wealth is laughable. Debt is a real number. The other part of that equation is what you hope you can get for what you have left when they're done with you.

I'm not anti debt. I have business debt. But debt complicates decision making and reduces the choices one has available to them, particularly in difficult times. Why tie one hand behind your back when you don't need to? The smart thing is always to get rid of it, as soon as possible. imo.
 
With the exception of housing (for most people), you shouldn't use debt for something you couldn't easily pay cash for. The debt you take on is simply a financial optimization mechanism. It doesn't alter any other choices you make except it makes you richer. The key is you make the purchasing decision based on income, total outgoings and your savings goal, not based on whether you can get credit for it.

For most people housing has to be borrowed. But it is typically the cheapest debt you can have and as outlined above very easy to beat through a 401k instead of paying down faster. After that, you should have the cash to buy everything you need and only use credit for financial reasons. Eg I was offered 2% on a car loan and took it even though I had cash.

The wealthiest people use credit this way all the time.
 
Originally Posted By: TrevorS
Originally Posted By: JHZR2
Nobody says it isnt. Its a matter again of how much in the first few years you have in the investment account versus the debt. If you have a non-trivial amount to invest, then you could pay the mortgage off MUCH faster and have a lot to invest with ZERO debt risk. If you have only a little, then you can get 6 or even 12% return, but the amount you are "earning" versus how much you are accruing and paying in interest (especially in the early years) is a huge delta.

And again, youre completely ignoring human nature and risk.


So you'd rather pay down your mortgage than build up your 401k?


Where did I say that? No place. But one cannot afford to own if they can't afford a property AFTER putting away 15% salary for retirement, covering the bills, and buying on a 15 year note.

Point is that smart planning is key, and playing financial games and trying to pretend to be savvy has left lots of folks broke and stuck with payments for life. A big return on a little bit is just a little money and a little interest on a big sum is a lot of money. Compounding is powerful, so if you can invest and compound over time, that is essential. But drawing out payments on a relatively huge amount of principal so you can get a little interest now is hardly worth it. With DISCIPLINE, the mortgage will be paid off ahead of schedule and then a real amount of money can go to investing. For most people, the amount they pay for mortgage is their biggest expense.
 
Originally Posted By: JHZR2

Where did I say that? No place. But one cannot afford to own if they can't afford a property AFTER putting away 15% salary for retirement, covering the bills, and buying on a 15 year note.

Point is that smart planning is key, and playing financial games and trying to pretend to be savvy has left lots of folks broke and stuck with payments for life. A big return on a little bit is just a little money and a little interest on a big sum is a lot of money. Compounding is powerful, so if you can invest and compound over time, that is essential. But drawing out payments on a relatively huge amount of principal so you can get a little interest now is hardly worth it. With DISCIPLINE, the mortgage will be paid off ahead of schedule and then a real amount of money can go to investing. For most people, the amount they pay for mortgage is their biggest expense.

For $400-500k house with 80% finance then 15 year mortgage is okay for many people, it's fairly difficult for some. For some Californians who want to own a nice house near the beach the cost is much more than a mill, even with 30-40% down the finance amount can be more than $1 mill. 15 years mortgage payment of $1 mill is not a small amount.

Why not investing real money while paying mortgage loan at the same time ? If you have 80-90% equity in your house but little money invested elsewhere and you need some substantial amount of money quickly for whatever reason, how do you get it in few days ? You can refinance with cash out or take home equity loan but it will take several weeks.
 
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15% to 401k and a 15 year mortgage? Glad I didn't read that before buying--I increased what I paid for rent slightly by buying. Had I taken that advice I'd be paying more for rent now, given how rent creeps up, while one can knock down a mortgage and refi when it makes sense.

15% seems kinda high, unless if you are planning on retiring early and/or not using SS and/or are looking to maintain one's salary in retirement. Certainly seems like a nice goal though.

*

What is this bit about "You'll get up to 4% tax free to reinvest, some capital growth with little risk, all on pre tax dollars. ... Meanwhile, the effective interest rate on your mortgage is near 3%." Company matching I get; pretax dollars I get. But reinvesting, and "effective interest rate" on a mortgage...? Are you taking what one pays in mortgage interest and subtracting the tax savings, and working backwards to lower the interest rate?

*

I can't imagine a $4-500k house on a 15 year mortgage... ouch! Once you get done with insurance and escrow... wow. Rolling my two car payments into my mortgage payment still wouldn't touch that. My hat's off to whoever can swing that.
 
Originally Posted By: artificialist
Anybody a fan of Dave Ramsey?

Anyway, I have 1 debt, and that is my car. I chose something that I could stay in love with many years. If something big needed to be repaired, I would pay it and say it was worthwhile. This was after replacing a Saturn that had a failing engine at close to 100,000 miles. Sure, the body was okay, but why would I put so much money towards an engine rebuild if I didn't enjoy it?


He shouts too much for me. I also don't see why we have to get Jesus involved in this.

I still recommend him to certain people though, but mostly those who lack impulse control and basically need to see getting their finances in order as a fanatical religious thing.

I did use his guideline for how much to spend on a house though, that was reasonable. IIRC it was don't finance more than 25% of your current monthly take-home income, basing it on a 15 year mortgage.
 
Agreed - Dave Ramsey's methodology is pretty basic but it makes sense for people that lack both impulse control and knowledge of what is necessary and what is not.
 
Originally Posted By: TrevorS
.... The debt you take on is simply a financial optimization mechanism. It doesn't alter any other choices you make except it makes you richer.


Disagree. One gets wealthy by owning property, particularly that which has inherent utility associated with it. One does not get wealthy by perpetually owing on things. That makes other people wealthy.

Originally Posted By: TrevorS
.... The wealthiest people use credit this way all the time.


And they crash and burn from it all the time, as well. There is nothing novel about the notion of chasing more money with one hand while holding a lower interest debt in the other. Sit in on a high stakes bankruptcy proceeding sometime - it can be a very eye opening window on what happens when economic theory collides with the real world when all the assumptions go wrong.

In my state, one quarter acre in city limits, or 40 acres out of city limits, can have unlimited improvements placed on it and it is exempt as a homestead, so long as one spouse lives there as a dwelling, except for a mortgage debt. In my opinion, a person is silly not to take advantage of this terrific way to place money off limits from creditors, particularly if one has a family.

I've come to disagree with much of what Mr. Ramsey teaches. But he's spot on about owning your dwelling.
 
Originally Posted By: Win
I've come to disagree with much of what Mr. Ramsey teaches. But he's spot on about owning your dwelling.


What is it that you disagree with?

(I'm not here to defend him, he's not my favorite either, I'm just curious)
 
Home purchase locally is insane. I could commute an hour (each way) and own a house for less than my 1br apt rent currently. No thanks, though. My time is worth more. It makes no financial sense to spread myself so thin to buy a condo locally and then not have any $ to save for retirement or be able to leave town on the weekends. FOR ME, renting is freedom. I can happily have fun on weekend trips without needing to be home to do some 'project' around the house or because I can't afford to go snowboarding as I'm tied to a mortgage. I plan to live my [early] retirement the same way. Why put all your money into a house and then you have to sit their all weekend long b/c you don't have any cash to go out and enjoy life? No thanks.
I guess if I had a wife and kids, I'd be stuck commuting that extra 2 hours a day, spending that much less time with my family, in order to provide a house vs apt for them to grow up in. Glad I don't have to deal with that.

(my thoughts regarding purchasing new vehicles are similar - I'm in it for the long haul and am fine foregoing certain luxuries in the meantime)
 
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