Money Reasons

Smart Reasons to Save, Use and Invest Money

Posts Tagged ‘debt free’

Mortgage Free versus Paying For 30 Years

May 3rd, 2011

Today I’m going to talk about why I believe paying off your home mortgage early makes more sense for us middle folks (and probably the upper folks too) instead of investing all of your extra money into the stock market.

From some financial advisors, we hear advise such as paying off your mortgage is a bad financial decision if not down right stupid.

But unless you are a robot, I don’t believe this is true!

Let’s looks at the argument for not paying off your house early. The typical argument goes that if you take the extra amount that you would pay on your house and invest it, you’ll end up rich some day!

The problem with that argument for the majority of us is twofold:

That extra money that you were (in theory) to invest somehow gets spent in a moment of weakness or financial strain during your life.
The standard deduction is so high that sooner rather than later the itemized deduction for a mortgage is not worth it after 5 or so years (Unless you have a $300,000+ house)

Another problem is what if the market tanks like it did in 2008? Investment returns aren’t guaranteed, but the lack of a house payment is forever (at least until you upgrade to a larger house…)!

Financial strain happens, and that is why it’s wise to have an emergency fund during this process. While I didn’t have a dedicated emergency fund per se, I had money in diversified portfolio (including fixed income) that I could hit if such a need came to surface.

Since I am mortgage free, and no longer have a mortgage, saving is much easier for me now (after a period of adjustment).

-MR

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Posted in Mortgages

Tags: 30 years vs mortgage free debt free mortgage free why pay a mortgage off early why pay off your house early

Financial Planning Isn’t Really A One Size Fits All Model

March 23rd, 2011

There isn’t a “One Size Fits All” model for financial planning.

Credit Cards

I love credit cards, no wait, I love reward credit cards! But this is my one exception where I deviate from the norm with respect to my friends and their spending habits.

I have a few friends that have gone bankrupt (in 1 case a few times) and so I will never say “I love credit cards” to them. I don’t want them to think that it’s okay to spend so easily. We have to know our limitations and weaknesses.

However, for me, credit cards are a wonderful discount on my purchases. Sometimes, I use the reward points to splurge and buy a nice gift that I would have had to spend money on.

Mortgage Pre-Payment

I took a path that I know isn’t considered the best for most, but it was the best for me. You see, I pre-paid and them totally paid off my mortgage early. I know that from a mathematical perspective it makes more sense to put that extra money in investments. But I couldn’t stand the debt hanging over my head, and I doubt I would have consistently put the extra money into investments, thus defeating the plan.

I very proud of my accomplishment with my house, and if I had to do it all over, I’m pretty sure I would have done it exactly the same. I especially like that fact that the money that I don’t have to pay anymore is like getting a 2nd job in many ways, especially with respect to cash flow!

While mathematically it makes sense to put the extra money into investments, missing in the formula is the human element. The equation is mathematical but the human element takes away some of the straight math properties and adds emotion and impulse buying elements. Shoot, I consider myself good with money, and even I sometimes have problems controlling my spending, especially when it some to my kids!

Investments

I tend to invest in stocks, but most of my money is in the mutual funds that are included within my 401(k) plan at work.

In my stock dividend “Lunch Experiment“, I run a high beta investment portfolio. This isn’t advisable and I’m only running such a portfolio because the money was money that I would have spent. I don’t advise anyone to follow such a risky portfolio, but it’s still fun to play with!

Conclusion

So what I’m really trying to convey is that there isn’t a single generic “one size fits all” type of model to follow when it comes to financial planning or advice. Perhaps start with one of the three financial advisors and then customize it after you find one that mostly fits your goals. Personally, I’ve always liked David Bach with just a slight hint of Robert Kiyosaki.

-MR

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Posted in Planning

Tags: debt free financial planning Free Lunch Experiment investment experiment Investments mortgage free One size doesn't fit all financial planning personal finance reward credit cards

Paying Off Your Mortgage is Like Working at a Second Job

March 2nd, 2011

House Working Part-Time?

Paying off your mortgage is like working at a second job!

By paying off my mortgage early, I get to keep an additional $15,000 a year!

Let’s say that you decide that your first job wasn’t enough money, or that you want to dig yourself out of debt. If you were to get a part time job working 20 hours a week at a wage rate of $14.42 all year round, using straight simple math, that would be the pay rate that it would equal to have $15,000.

But that’s not entirely true, actually you would have to work 20 hour at a pay rate of $18.03 (assuming your in the 25% marginal tax rate). The reasons for the higher pay rate is that the money that you would pay your mortgage with would be after tax money. Even that number is low since I didn’t take out FICA, insurance, state tax, etc!

This year, I’ve really noticed that my checking account balance is growing quickly! I’ve transferred money from my checking account into my online brokerage account every so many months. It’s been great!

Some may say “but what about the itemized mortgage interest deduction and the fact that you cannot deduct the interest on mortgages” . Well, I’m going to tell you a secret… after you get your mortgage payments low enough after a few years, the standard deduction is so high that those itemized deductions really don’t matter! For my family, it didn’t take long to hit the break even point between the standard deduction and itemizing things. Since we were prepaying, we met this crossover threshold after about 5 years.

The extra money has come in handy for us, making it easier to afford sports and other activities for our kids. We are also planning larger vacation, perhaps even overseas soon.

The beauty of that extra $1,250 each month is that I can invest most of that money so that it even grow more quickly!

Do you share my viewpoint that not paying $1,250 extra a month would be equivalent of getting a part-time job working 20 hours a week? Of course, if for some reasons my primary job was lost, so would my pseudo part-time job too.

-MR

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Posted in Mortgages

Tags: debt free morgage free No mortgage is like a parttime job

Debt Free, Now What?

October 11th, 2010

This past February 2010, I became totally debt free, but now what!

I thought that there would be a period where I would break even for a while, and then start to plow about $1,000 extra each month into investments! So now that it’s seven months later and how much extra did I save or invest? Not a single cent!

So what’s the problem? Why haven’t I been able to catch up?

Well it’s been a matter of bad luck with equipment breaking down and needing replaced and spending too much for our past vacation to Hilton Head Island!

But it’s also been a subtle form of LifeStyle Inflation! Thinking back now, I realize that when wants would arise, I would just go ahead and buy it. Yeah, I thought about it a bit, but I knew that I had the cash. Then when our car and lawn mower broke down, I had the cash too…

So now will I begin my saving and investment regiment? I certain hope so!

The only think that I’m worried about is the fact that my house is over 10 years old now, and it seems like things are starting to look a little run down! I expect things to start breaking soon or later!

I decided to lower my expectations to only save and invest $500 a month. Hopefully, I’ll be able to build back up to $1,000 though! I plan on paying myself first this time. That way I won’t have to feel guilty about missing my goal!

We’ll see if i can get my lifestyle expenses under control so I can accomplish my new goal!

-MR

Other Projects and Experiments:

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Posted in lifestyle

Tags: debt free growing money investing lifestyle creep lifestyle inflation

Being Debt Free is like the Driving Part of Being on Vacation

March 8th, 2010

As a kid, do you remember that rush of excitement you would get, when you knew you were crossing into another state? You’d see that big billboard sign welcoming you to a supposedly wonderfully great state. Of course, your family was just passing thru and had no intention of checking out any touristy stuff they might happen to have in the their otherwise “Great” state…

Do you remember the feeling about 15 seconds later after you asked how much further before the next new state, and learn that this new state had an even long drive time to get through than the last state?

Well, that’s how if feels for me right now, since I’m now in the asset building phase. And I have to juggle 2 kids and their various activities and needs on top of that. Though I have to admit, I’d rather deal with the upcoming kid issues now than in the past.

But, the feeling I’m having now is wrong (at least if I do it right)!

Over the next 2 months, I’ll have (for me) three decent sized infusions of cash (taxes, saved money from no house payment, and the bonus from work), that I’ll be able to invest in a low risk dividend stock. This will kick off the creation of my life long dream of the start of a Dividend Portfolio to cover my expenses. If you’ve been following my site, for the past 6 months or so, I’ve been doing a lunch experiment where I eat cheap at lunch and save the money to invest in stocks that yield dividends. The idea was to invest enough to have the Lunch dividend fund eventually pay for some or all of my weekly lunches. That would free up that money for other purposes (like investingJ). Through sacrificing (it wasn’t that bad really) by packing lunch (oh, the agony), I would save $40 a month week to invest in stocks. Of course, I didn’t invest it every month week because the transaction fees would have eaten me alive (I waited until I got a big lump sum, then purchased stocks)… I’m up to 1 fully funded lunch a week already!!!

Hopefully, the next time I write about this, I’ll have some snapshots of where I’m going with these funds and some conservative projections!