Money Reasons

Smart Reasons to Save, Use and Invest Money

Posts Tagged ‘mortgage 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

I Am Debt Free, My Mortgage Countdown #1 – Equilibrium

February 22nd, 2010

At Equilibrium

We’re Debt Free! We don’t have credit card, car, mortgage or any other type of debt!

Two weeks ago, on the Wells Fargo Website, we chose the send “Payoff form” option for our last mortgage payment.

My wife filled it out, and we sat on it, waiting for Wells Fargo to pay our real estate taxes from our escrow. Now that they did that, we still have to pay our house insurance at the beginning of March, but… We sent in our last official mortgage payment!

Actually the check is sitting on our kitchen counter downstairs, waiting for me to put it in the mailbox! Tomorrow, I will drop it off at the post office, and then we are finished with it!!! (Booyah)

We ended up paying off our house in a little over 10 years.

So how did we do it?

Well, first we created an excellent excel spreadsheet (later converted to open office) to do some analysis on our amortization schedule.

Primarily, we used primarily 2 sheets in our House Payments spreadsheet:

The actual payment that was recorded sheet. This sheet was the real deal! As soon as I made a payment on the house, it was recorded in this sheet. Not much to this one, pretty cut and dry. At the top, I calculated the reduction in interest paid by pre-paying, the shorting of the life of the years of the mortgage by prepaying, and the total cost of the initial mortgage plus the interest.
The “What If” analysis sheet, was the same as the first sheet, but I copied the formula that referenced the payment amount all the way to point the mortgage would be paid off. This was my play sheet! I used this sheet soooo many times to calculation my payment schedule! It was truly great.

Next for the first year of the mortgage, we made double payments on the mortgage amount, with the excess going toward paying down the principal. Then later after our son was born (and my wife quit working), we lessened the payment amount to only 1.5 times the original payment amount.

I’m still in disbelief! I’m at a point of balance and having an “equilibrium moment”, so to speak!

As of this point forward, we will be solidly marching on a wealth building path (or at least I hope, life sometimes throws some wild pitches at you…).

As the last phase of this final numbness wears off, I’ll tell you what it feels like being debt-free in a future post!

-MR

Update: An equilibrium moment is when something is in perfect balance! I don’t owe any debt anymore and nothing is owed to me either! With the “debt phase“, I’m in perfect equilibrium. This phase is over! I don’t plan on ever going into debt that I can’t pay in a month’s time again!

Here are some links to former post in the Countdown series

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Posted in Mortgages

Tags: debt free early payments on house financial freedom mortgage free payoff house totally debt free

My Mortgage Countdown #2, Then There Was 1…

January 12th, 2010

We just paid the 2nd to the last payment on our mortgage!

1 left

It’s a odd feeling. Now that I’m so close I’m actually feeling a bit anxious about what comes next after we do pay off the mortgage. At this point we’ll be totally debt free. We don’t have any car loans (I paid off my car loan off last year), nor do we have any credit cards with balances on them. I’m excited, but intimidated by the fact that I will be starting at ground zero with my next financial path which is financial asset accumulation.

So what does my house look like?

Our house is similar to this one.

Well, it’s a colonial style house that is a 4 bedroom house, it measure about 2,100 square feet and is about 10 years old. We only have about 1/4 of an acre, so our lawn is pretty small. Luckily we live relatively close to a park (it’s only a few houses down the street). We have a kitchen, recreation room, media room (computer/library), 4 bedrooms, kitchen, laundry room. We didn’t finish your basement yet, but if we did, it would add at least another 600+ square feet.

To me, our house is just a house, but to my kids and wife, it’s the perfect house. I often through out a “let’s looks for a new house” speel, but both my kids and wife are content where we are. Financially, it makes sense for us to stay too, but I get antsy sometimes.

It will have taken us a little over 10 years to pay off our mortgage. Initially, we started with a 30 year mortgage. But through extra payment and few refinances (we switched to a 15 year mortgage), we whittled it down.

My next payment will be a little more expensive for me, it will be $1,581. But then that’s it!

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Posted in Mortgages

Tags: Mortgage mortgage countdown mortgage free Mortgages

My Mortgage Countdown #3, Year End Financial Crunch

December 11th, 2009

It already feels like I’ve crossed the debt-free threshold!

Mortgage Countdown #3

December is always tight for us! Especially this year, since we took our first trip to Disney. It also get tight because I claim zero exemptions (I know this is a bad idea).

Once my house is paid off, I’m going to change my exemptions to 2. That will even increase my cash flow even more during 2010. I’m still mulling around ideas about what to do with that extra income. I got a few more months though. I’m hoping the ideas just start jump out at me, and soon!

Last month I blogged about Mortgage Milestones, and this technique served me well (my wife wasn’t so crazy about my idea of paying the house off early), since it softened my wife’s concerns…

The amount that I now owe is down to $3,755!

It’s funny, I had planned on making a $5,000 payment early in my payment schedule (in my spreadsheet), so I would have had my balance paid off by now. But, I decided not to take the chance when the economy started to tailspin into the recession.

Now that I almost have that extra expense gone, I have all these great ideas for funds that keep popping in my head. Unfortunately there are too many and now I feel like I’m behind the eight ball again.

My next post about this, “Mortgage Countdown #2” will have some real ideas for what to do with the extra money I’ll be saving!