Should You Invest Or Pay Off Your Mortgage?
Episode 133R
Episode Guide
Episode Timestamps
ChooseFI Episode Show Notes
Episode Title: Paying Off Your Mortgage vs. Investing
Hosts: Brad Barrett, Jonathan Mendonsa
Guest: Ariel
Episode Summary:
In this episode, hosts Brad Barrett and Jonathan Mendonsa discuss the financial decision of paying off a mortgage early versus investing the funds. Ariel joins to share her personal journey, offering insights into budgeting strategies and mortgage optimization. The conversation emphasizes the significance of informed decision-making based on calculated risks, illustrating how small lifestyle changes contribute to achieving financial independence.
Key Topics Discussed:
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Introduction to Paying Off Mortgages:
The hosts introduce the episode's theme, highlighting the debate of paying off mortgages early or investing instead. -
Brad's Budgeting Journey:
Brad shares his family's budgeting experiences, including a shift from Mint to YNAB for financial management. -
Introduction of Ariel and Her Story:
Ariel discusses her background and how she became interested in the financial independence community. -
Ariel's Spreadsheet Analysis:
Ariel presents a detailed analysis comparing mortgage payoff and investment strategies, showcasing compelling calculations. -
Comparison of Mortgage Payoff Strategies:
The discussion focuses on the pros and cons of paying off a mortgage early versus investing money in other assets. -
Event Announcements:
Brad shares upcoming events related to the financial independence community.
Actionable Takeaways:
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Implement Effective Budgeting Tools:
Consider trying YNAB for more effective budgeting, especially if currently using Mint. [Timestamp: 00:05:40] -
Establish Joint Savings Goals:
Discuss and set savings targets with your spouse to create a joint budget. [Timestamp: 00:03:23] -
Analyze Financial Decisions Carefully:
Evaluate whether paying off a mortgage or investing provides greater financial benefits in your specific circumstances. [Timestamp: 00:44:45]
Key Quotes:
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"Imagine the best case scenario: my wife's satisfaction is at an all-time high."
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"Powerful life advice: All they could say was, no. #TakeAction #FinancialIndependence"
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"Ask yourself: What would it look like if you took that leap? #MindsetShift"
Discussion Questions:
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What financial strategy resonates with you regarding paying off debt versus investing? [Timestamp: 00:18:00]
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What budgeting tools have you found useful? [Timestamp: 00:04:40]
Related Resources:
- YNAB: Website Link [Timestamp: 00:04:40]
- BiggerPockets: Website Link [Timestamp: 00:25:00]
FAQs:
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What budgeting tools are recommended?
YNAB is noted as a better budgeting tool compared to Mint. [Timestamp: 00:04:40] -
What is the benefit of paying off a mortgage early?
Saves significant interest but may not always be the best financial decision compared to investing. [Timestamp: 00:38:00]
Chapter Markers:
- Introduction to Paying Off Mortgages
- Brad's Budgeting Journey
- Introduction of Ariel and Her Story
- Ariel's Spreadsheet Analysis
- Comparison of Mortgage Payoff Strategies
- Event Announcements
Podcast Extro:
"You've been listening to ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time."
Strategies for Financial Independence: Balancing Mortgage Payoff and Investment
Achieving financial independence is a critical goal for many individuals. A key question often arises within this pursuit: should you prioritize paying off your mortgage early or investing your funds? In this article, we will provide concrete strategies derived from recent discussions that delve into this topic, offering insights to help you make informed financial decisions.
Understanding Your Priorities
Assess Your Financial Goals
Before diving into the specifics, it is crucial to clarify your financial goals. Understanding your aspirations will influence whether paying off your mortgage or investing serves you better. Consider questions such as:
- What is my timeframe for financial independence?
- Am I currently in a state of debt, and how does it impact my cash flow?
- Do I prefer the security of being debt-free, or am I comfortable with managing investment risks?
Once your goals are clear, you can better evaluate your options regarding mortgage payments and investments.
Budgeting for Success
Implement Effective Budgeting Tools
One of the first steps to optimizing your finances is establishing a robust budgeting tool. YNAB (You Need A Budget) is highly recommended for creating actionable plans. By using YNAB or similar budget software, you can closely monitor spending, plan for future expenses, and allocate funds towards debt reduction or investments effectively.
- Action Item: Try implementing YNAB to manage monthly budgets and establish clear savings goals.
Creating a Joint Budget with Spouse
When evaluating options like paying off a mortgage versus investing, it's essential to discuss and create a joint budget with your partner. Collaboration can lead to clarity on financial priorities and facilitate better decision-making.
Investment vs. Paying Off Debt
Evaluate the Cost-Benefit of Paying Off Your Mortgage Early
Paying off your mortgage can yield substantial savings in interest over time. However, it’s essential to weigh this benefit against the potential returns from investing.
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Use Calculators: Utilize online mortgage payoff calculators to assess potential savings in interest based on various scenarios.
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Analyze Your Interest Rate: If your mortgage interest rate is lower than the expected returns from investments (e.g., in the stock market), investing may provide greater long-term financial benefits.
Consider Investment Options
Investing in index funds, such as VTSAX, could lead to significant growth over time. Here’s how to evaluate this option further:
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Calculate Potential Savings: Consider investing the same monthly payment you would pay on your mortgage into a diversified portfolio. For example, investing an additional $500 per month could save you months or years off your total payment schedule, depending on market returns.
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Investment Returns: If you expect around a 6% return on your investments, you can evaluate the trade-offs between paying off your mortgage and allowing investments to accumulate.
Strategies to Enhance Financial Savvy
Embrace Life Hacks for Cost Reduction
Implementing lifestyle changes can have a significant impact on your overall financial situation. Here are some actionable life hacks that can help save money:
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Home Haircuts: Consider doing haircuts for yourself and family members to save substantial amounts annually.
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Gardening: Growing your own herbs and vegetables could lead to consistent savings in grocery bills.
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Switch Grocery Stores: Explore budget-friendly grocery stores, like Aldi, which can reduce your grocery expenses by a significant percentage.
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Community Resources: Join local community groups to share resources, tips, and further financial independence strategies.
Continuous Learning and Networking
Engaging with communities such as personal finance forums or local meetups can enhance your financial knowledge. Learning from others' experiences can provide insights into making smarter investments and financial decisions.
Key Takeaways for Your Financial Journey
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Establish Clear Financial Goals: Understand what you want to accomplish both short-term and long-term.
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Utilize Effective Budgeting Tools: YNAB can significantly enhance your budgeting capabilities, allowing you to track spending and prioritize savings.
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Evaluate Your Debt vs. Investment Opportunities: Pay attention to the trade-offs between paying off debt early and potential investment gains.
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Incorporate Smart Lifestyle Choices: Use practical life hacks to save money while working towards your financial independence.
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Seek Continuous Learning: Surround yourself with like-minded individuals who can contribute to your understanding and execution of financial strategies.
Conclusion
Balancing the decision of paying off your mortgage early or investing requires careful consideration. By assessing your priorities, utilizing effective budgeting tools, and implementing cost-saving hacks, you can create a pathway towards achieving financial independence. Remember, informed decision-making based on your personal circumstances and goals will guide you in your journey towards financial freedom.
Brad and Jonathan discuss a burning question in the FI community, a new budget experiment, and an update on Playing with FIRE.
[elementor-template id="143609"]You Need A Budget Experiment
Jonathan and his wife have decided to give You Need A Budget a try. Although they have no consumer debt and maintain an aggressive savings rate, the luxury of not living paycheck to paycheck means that the low-level lifestyle inflation happens. As a self-proclaimed spender, Jonathan claims that his natural state is to find things to buy.
Jonathan's wife is really interested in finding a way to better understand where every penny goes. The family used to use Mint for tracking their spending as they paid down debt, but it is not really designed for budgeting out your money.
Several members of the FI community have raved about YNAB. With that recommendation, Jonathan and his wife have decided to give it a try. Although the subscription is $84/year, it seems to be worth a try.
If something allows you to create a plan for your money, then I think it might actually be worth it.
The couple will be experimenting with YNAB for the next one to three months. Stay tuned for how it goes.
Related: My Favorite Budgeting Software: YNAB Review
Airbnb With Zeona
Zeona provided another example that the path to FI is not linear. With her adventurous spirit, she created an experimental lifestyle that paid off in the long term. One of the biggest inflection points for her was when she had to ask for $144,000 from an investor to expand her Airbnb business. She had to get creative.
Zeona told us that the worst thing that could happen is that the potential investor said no. And that is completely true!
Hard money lenders are out there, they are just waiting for the right opportunity to invest. In order to find a hard money lender for your real estate ventures, you need to arm yourself with the right information and crunch the numbers of several deals. Once you find a good deal, then you'll have a decent shot of finding funding. It is simply a limiting belief to think that you cannot make a real estate deal happen if that is what you want to do.
Each of us has a limiting belief that holds us back. How would you reframe your thing that you say you can't do?
In Brad's example, one of his limiting beliefs is that he cannot take family vacations during the school year. However, with just 15 seconds of thought, he was able to come up with some alternatives to pursue.
Are you holding yourself back by refusing to ask the right questions? The questions that you allow yourself to ask can dictate your future. Think about your limiting beliefs, can you change your frame of mind?
Listen to the whole episode with Zeona here.
Pay Off Your Mortgage Or Invest
Ariel came on the show to share her spreadsheet that helped her find an answer to this daunting question. Here's a link to the Google Spreadsheet that Ariel provided.
Ariel's Path to FI
Ariel and her husband graduated from college without any student loans, so they have been able to start saving from a young age.
Around two years ago, she was researching ways to make extra money. However, she had an 18-month-old at the time and realized that a big side hustle was not going to work for her. During the search real estate had piqued her interest. She found Bigger Pockets, then Bigger Pockets Money and finally ChooseFI.
Quickly, she realized that FI was a real option for her family. She knew that they needed to do something other than save their money into something better than a savings account in order to make that happen.
On her journey towards FI, she has found a series of life hacks that have helped to lower their expenses. She teaches a paid group fitness class for a free gym membership, cuts her family's hair, bought a gel nail lamp to cut down on manicure costs, and starting going to ALDI. With those seemingly small hacks, she has been able to put around $500 of space into her life each month.
My life is no different but I'm saving money.
As a family, they have decided to prioritize the time they have with their little ones. Instead of rushing to FI in seven short years, they will spend more time at home while their boys are young. Her husband has moved to part-time work and she may or may not go back to work part-time when their kids hit school age.
The next decision was what to do with this extra money?
Pay Down Mortgage Or Invest Spreadsheet
Ariel came from a Dave Ramsey approach. With baby steps one through seven.
- Save $1,000
- Pay down all debt except house using the snowball method
- Save 3-6 months of expenses for a fully funded emergency fund
- Invest 15% of household income into retirement investments
- Save for your children's college fund
- Pay off home early
- Build wealth and give
Both Ariel and Jonathan agree that steps four through seven are "no man's land." At that point, you have choices. You can follow the Ramsey steps exactly or create a better way.
With her love of spreadsheets, Ariel created a way to decide whether or not paying off her mortgage early made sense.
Ariel and her husband bought their house for $310,000 with 20% down. The 30-year mortgage with a 4% interest rate would bring their total interest payments to $178,000 over the life of the loan. For a total cost of $426,000. With that high number, Ariel knew that they wanted to do something better than that.
With an extra $500 a month to spend on either the mortgage or investments, she made some calculations. If she put the extra money towards the mortgage, then they would bring down their total interest payments to $93,000 and pay off their mortgage at 203 months.
Next, she calculated the investment route. If they put $500 a month into VTSAX at a 6% return, then it would only take 182 months to earn enough money to pay off the mortgage which amounts to a savings of $36,000. Of course, the returns of the VTSAX are not guaranteed to be 6%.
Ariel chose to put her extra $500 into VTSAX instead of extra mortgage payments. What will the numbers say for you?
Related Article: Should You Pay Off Your Mortgage Or Invest
Playing With FIRE Update
The documentary tour is spreading across the country. Brad and Jonathan will be hosting a showing in Richmond, VA at the Byrd Theater on July 19th. With 600 tickets up for grabs, everyone is invited. Our hosts will be giving a short introduction to FIRE. Head over to Tugg to grab your tickets.
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