Financial gurus: What do you think?

Weird combo of being timid with what you do with your paycheck, but high risk with your retirement account investment.

Seems like you're doing better than average:

https://www.personalcapital.com/blog/retirement-planning/average-401k-balance-age/

Paying down extra principal on a mortgage is an awful idea. Stop doing that.

Mortgages are set up so that you pay interest upfront. Paying down the principal in advance does *not* reduce the interest debt you'll have to pay. You're throwing away capital that you can invest or otherwise use today, and you're gaining absolutely nothing in return.

Also: You need to diversify your retirement account. The US market will almost certainly take a hit in the next few years. You should not put all of your eggs in one basket, especially this late in the game. Buy some total market funds for Europe, Asia, and maybe a bond fund. You might also want to allocate some funds into a smaller US cap band if you decide to keep S&P, or just migrate everything into a US total market fund. You can allocate however you see fit, but better to read up on country forecasts by people who know what they're doing. Google around and you'll find various opinions on what to do.

I'm a finance guy... MBA type

I never understand why people like you get obsessed about being debt free, to the detriment of your finances.

It's a really weird thing that I encounter a ton.

Debt isn't some horrible thing.... in fact it's a great thing, especially at low rates. There's a reason why companies like Apple issue tons of debt despitre having billions of cash on hand.

You're paying your mortgage off, which is probably at some super low interest rate, and wasting $ that you could have otherwise invested in the market to get a higher return.

If you were smart, you would have just paid the regular 15/30 year mortgage payment and invested your excess cash flow into the market (S&P 500 index fund) and earned 10% per annum. That money would compound year after year and you would have reaped significant benefits of this strategy.

In essence, you're pissing away $1's that could be worth $1.10 in a year from now... and $1.21 a year from now... just to say you're debt free. It's a weird look.

The goal is to maximize your net worth... my recommendation is to stop focusing so much on being debt free.

mortgage prepayment wrote:

Paying down extra principal on a mortgage is an awful idea. Stop doing that.

Mortgages are set up so that you pay interest upfront. Paying down the principal in advance does *not* reduce the interest debt you'll have to pay. You're throwing away capital that you can invest or otherwise use today, and you're gaining absolutely nothing in return.

What?

Usually if you pay down principal, it reduces your interest costs.

My concern has always been that we really cannot predict the market, especially in the short term. Sure, I might be earning a 10% return on that money, although is higher than the historical average. But I might also lose money over a shorter horizon. Paying down mortgage debt functionally locks in a crappy return, but at least it is a positive return.

And if my horizon was longer maybe I'd be okay with that market volatility risk. But if I want to retire in the short term and have a better sense of what my monthly expenses are, we'll, I worry I'm on a shorter investment horizon than justifies the risk.

So with a 5-6 year horizon for reducing my monthly housing expenses, and given where we are in the economic cycle, do you really think the better bet is to invest in the markets and expect a better than 2.2% return over that time frame than to lock in the 2.2i% by prepaying my mortgage?

I get that you wouldn't prioritize the reduced housing expense, but let's assume you would for purposes of the question above.

I am not a financial guru. Just wanted to stop here and say Wejo is part of the intelligence community and that his dad hooked him up with the job. Robert is like the runt or black sheep of the family. He pockets the letsrun money and then flaunts his expensive baby purchases.

The best thing you are doing is maxing your 401K each year. You are probably now at an age where you want to ratchet down your stock allocation in that from 100% to say, 75% or so.

But, you don't have jack for savings outside of that. With your income, you should have a much greater net worth than you have. You need to get a handle on all of your spending. Where the heck is all the money going that you are making more than $300K a year and aren't saving anything beyond your 401k?

Regarding the house debt, in general, there is nothing wrong with keeping a mortgage and investing rather than paying it down, but you are so close to paying it off now you might as well continue as you are.

One, reading how you view money, there is no way you would blow through extra cash if you didn’t pay more down on mortgage principle.

You would likely pile up more cash savings making you more liquid to put money into a good invest like a summer home that you can use and/or rent out.

Or more reserve if something went wrong. You can’t get that extra principle back you’ve been paying on without selling or refinancing.

Two, you didn’t mention any plan for the future of your four kids.

My wife and i paid off a mortgage early much like you are in the process of doing. I think at one point we refinanced a 30 ear into a 15 year and then made an extra payments on a regular basis on top of that. Our timing was really good because as it turns out, we paid it off about 10 years early and that was 2010 (my wife remembers the year and says "I'll never forget it") Then we jumped on the opportunity to put every penny of the extra money we had with no mortgage payments to pump it into the stock market at what turned out to be an historically wonderful time to be doing so. That paid off handsomely, at least so far...

I get the case for not buying down the debt but it just has to do with what will motivate you. And please consider that our interest rate was higher than it is today.

Given where we are, or more accurately, where we believe we are, in the market cycle, I would think now is a good time to put that money into buying down the debt. And consider that since the interest is front loaded on conventional loans, paying it down aggressively really helps at getting at the principal amounts if you can really take a bite out of it like you are doing.

It's all a guess with the market, but my best guess is that with the slowing economy forecast for the near future, the second half of the year may not be the best time to be plowing money into the market. For that reason, I would lean towards paying down the mortgage.

And like I said, my wife really enjoyed the feeling of getting it paid off, so that's worth something for sure.

You say u have 4 kids but make no mention of their ages and your plans or intentions for college expenses. That could be a hefty chunk of change and doesn’t sound like u have much liquidity for those outlays.

I would suggest not being so aggressive with prepaying the mortgage and build up some liquidity. Even if just parked in a money market account it will earn 2.x% which will almost offset the interest expense of the mortgage. At worst you will be paying about 1% in exchange for liquidity.

You also say a big portion of your comp is variable- all the more reason to have some cash on hand in case variable turns out to be less than expected.

Former hedge fund guy here. I don't have a problem with the mortgage. It's essentially leverage for your other investments with your home as collateral, but it's low risk because of your job and nest egg. You aren't over leveraged with that setup. Debt can accelerate wealth when used appropriately, as other posters have said.

Let's talk about the nest egg. Having your entire liquid net worth in the US stock market is a BAD IDEA. All you other 401(k) dudes out there heed this advice too. Keeping your life savings in a vehicle that can lose 60% of its value in the next year is never a good idea. I understand that US laws have basically forced you to invest in stock market or bond market index funds, but find a way to be more diversified.

mortgage prepayment wrote:

Paying down extra principal on a mortgage is an awful idea. Stop doing that.

Mortgages are set up so that you pay interest upfront. Paying down the principal in advance does *not* reduce the interest debt you'll have to pay. You're throwing away capital that you can invest or otherwise use today, and you're gaining absolutely nothing in return.

.

This is why you do t take investment advise for a unknown person on the internet.

You can debate whether paying off a mortgage is a "good" or "bad" idea (depending on whether you subscribe to Ric Edelman's philosophy or Dave Ramsy's).

But there is NO debate that paying off a mortgage early means you are paying less in interest. Only an abject ignoramus would suggest otherwise.

Here is how your mortgage (indeed, 99.9%) of loans work:

You borrow principle+interest. That amount is divided in X equal payments. Interest is structured so you pay more interest and less principle up front. The more principle you pay up front, the best interest you pay because you borrow the money for a shorter period of time. The more principle you pay up front, there is a smaller amount to apply interest to.

Too many people attend a dumb D2 or D3 school and major in liberal arts. You are correct but it is amazing how people don’t understand this because they think interest is somehow frontloaded. Interest calculated yearly but mortgages are set up for morons who want to see even payments over the period instead of structuring their own schedule. If you have a $100k mortgage, let’s assume that you will pay $200k by the end of the mortgage but if you pay it off after a year you will only pay $100k plus 1 year of interest. That’s it.

Paying off a mortgage early may not make absolute financial sense, but it's not all about dollars and cents. If it makes you feel good to get out of a mortgage, do it.

That said, you should only pay off a mortgage early after you save 10-15% of your income for retirement. Most likely your money invested will do better than your mortgage rate, so make that commitment first.

And you said half your money is in an sp500 fund. What about the other half? You should be around 75-80% stocks at this point, I'd say.

No one with a good income like you should be cash flow negative tho. Grow up, eh. #toughlove.

Are you really this dumb? Please stop giving people advice in any facet of life. You couldn’t be more wrong. Obviously making extra payments reduces interest paid over the life of the loan. 3 major factors govern the amount of interest paid. Principal amount, interest rate, and time. Paying the loan off sooner reduces time and therefore reduces interest paid. Now please stop giving out advice m oron.

My present income now is a little deceiving. I am a partner in a consulting business that has grown over time. II have only been in this income range the last 5 years or so. For about 5 years before that, I was in the low to mid 200s, and for about 10 years before that I went from low 100s to low 200s, and before that, I was mostly in college, grad school and doing internships. I have been over 300 only 3 times.

As to putting 10-15% away towards retirement before paying down my mortgage, I functionally do that by maxing out my 401(k) and then adding in another $10k-$12k from my year end bonus (since we are a small partnership, we functionally pay our own match). So that's about $30k per year into my retirement account.

I know that from a mathematics standpoint, investing the excess mortgage payments would yield a better return, as I pointed out in my original post. But part of why I want to be debt free is because I am not sure how much longer I want to work with my partners. They are all hard working, but the dynamic has changed over time and I want the flexibility of being able to walk away from the business. While having a big investment account would be one way of giving myself that flexibility, I worry about market volatility robbing me of the opportunity to make that kind of "short notice" decision. Another great recession or even a less significant correction could have a profound impact on that separate investment account in the short term, whereas if I am debt free in 5 years or so and there is a recession, I will still have the flexibility of walking away from the consulting business and doing something that I would enjoy more. I am thinking about teaching in the public school system.

I also feel like paying down my mortgage debt offsets the moderate riskiness of my retirement account. First, given that I don't plan to start on drawing on it for another 15-20 years makes me feel okay about the allocation I have right now. I have a long enough time to weather storms when it comes to that account. I view the over payment of my mortgage as the equivalent of a low risk money market account that offsets my other, higher risk retirement savings.

I think the liquidity issue is the most compelling argument that I am hearing about my current approach. I may take a mixed approach and reduce my overpayment by $1500 and invest that so that I have increased liquidity and the potential for some increased return.

And I am only negative cash flowing because my salary is intentionally low. It is a value decision my partners and I made years ago. With a gross income of $13,000 a month and a net income of $8500 a month after deductions which include my retirement account a mortgage payment of $6,700 per month (including taxes and insurance), I only have about $1800 per month to cover all of the other expenses of a family of 6. I don't see a problem with that given that I am prefunding the cash flow deficit.

You can’t time the market yadda yadda ya....

But, putting more cash towards paying of your mortgage right now isn’t a bad idea. There are huge tail risks in the market right now.

The risk free return (or more precisely the equivalent of) of 3% from paying of your mortgage, is at least equivalent to the risk adjusted return in the market right now. Which is to say the expected return in market is higher, but the risk is much higher too (imo far more than normal).

So paying off the mortgage right now isn’t a bad idea. If the market does crash, then you should reassess, but will have the ability to put a large portion into the market at that point.

You asked a question... got some great advice and seem to think your path is the best one.

By all means, continue paying down your mortgage and getting a ~2.2% return when you could get ~10% in the market.