| 401K Investing Over Buying House in Cash? |
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YoshiMoshi
New Member
Cash: $ 1.20
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Joined: 21 Jul 2016
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| 401K Investing Over Buying House in Cash? |
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Sorry that this is a bit long, but I really would like people to provide there thoughts. I know you only get to live life once and people that have been through retirement know more than me about this so please help!
So I admit that I'm a bit illiterate when it comes to 401K. I understand the basic principles. I understand that it's seen as a "safer investment". I understand that it's probably a good idea if you have the money sitting around. And so forth. However red flags start to go up when ever I hear someone saying it's "free money"! I know that the 401K was never supposed to be it's own source of income once you retire but part of the "3 legged stool".
However I'm at a standstill if I should be investing in a 401K or saving up cash to buy a home in cash. See the thing is I'm only 24 years old and estimate that I can have approximately 125K cash in my bank account if I delay investing into my 401K within the next three years. This in turn will allow me to purchase a decent home that I can actually live in, with cash. Moving closer to my job is a must ASAP because I currently spend over an hour one way getting to work. I'm killing myself, I'm killing my car...
My background is that I'm weird. I have no debt of any kind or ever had any debt of any kind. I have never paid a penny in interest, not a single cent on any debt or loan or credit card. I know people my age are normally very irresponsible when it comes to money, are several grand in debt because of student loans, car loans, and credit card debt. If I belonged to this "normal" category that apparently most people fit in, and I was going to be thousands of thousands of dollars in debt for the rest of well forever, than it would be a different story perhaps. If paying off debt for the rest of forever was just going to be how life was for the next several decades, and there was nothing I could do about it, than yeah it would probably be a good idea to invest lots into a 401K perhaps.
I believe debt is the devil. I know that if I start investing lots into a 401K, It's going to delay the process of me moving out, and will increase the probability of me having to take out a loan on a house.
I remember back in the day calculating that if I took out a 200K mortgage over 30 years, I would be paying about 1000 a month. To me that's reasonable, perhaps even on the generous side because it's kind of low for rent in my area, but the point is it's doable and I could reasonably do it. I remember the calculator telling me I would pay some like 370K for 200K house which is insane!
So I know that I want to get a cheaper house, and if I have the opportunity to save up just a little bit longer than why not.
So if I was investing in my 401K, let's say I was doing the max amount each year 18k for the next 40 years, yeah I know with time they increase the max you can contribute. I don't think I could even afford 18K a year because I make about 66K a year before taxes, and if I were to contribute that much, I would defiantly have to take out a loan for a house, making it even harder to get to the maximum amount. But lets say for sake of argument somehow I was able to contribute that amount for the next 40 years (not possible). Lets say my company matches penny for penny for the first 4% and 50 cents per the dollar for the next two percent. So If I was contributing 18K a year, with the company match that would be 18000 + 18000*.04 + (18000*.06 - 18000*.04)(1/2) = 18,900. Now I've heard it's reasonable that you can "double your money" with this free money (lol). So lets assume this is the case. Meaning I would get 18,900 free money (lol) that I would be missing out on over these three years or 56,700 dollars of free money that I would be missing out on once I retire. Now if I take that amount of free money and divide by the amount of years I'll be working to get that money 56,700/40 is 1,417.5 a year lost for the next 40 years. However since I'm giving myself the maximum of three years before I purchase a house I'm looking at a lost of 1417.5*3 = 4252.5, not even enough for a good used car. And that 18K*3 = 56K that I could contribute otherwise to purchasing a house when I'm young and never have any debt ever!
So I know that I'm losing this money, however I know that if I take out a loan for a house, as apposed to paying for it in cash, I'd pay much much much more than 4252.5 dollars in intrest!
So my point is should I save up for the next three years to get approximately 125k cash and buy a home in cash by the age of 27 or invest lots into a 401K?
I know that the idea of not having a mortgage sounds great and to some people is common sense! But I find myself confused as to what is the best thing to do!
I know, I know... money is not everything and we are talking less than 5k difference lost, and several thousand of debt. I know that the young want to be old, the old want to be young, it's only once we live life we wish to withhold. Having no debt for ever is a beautiful thing and would bring me happiness when I'm young as apposed to old. I know that if you have more money than you need you don't know what to do with it. I know that if you have no debt, own your own home, own your own car, own your education, no credit card debt, you can live well under 1k a month, or less than 12k a year. So what on earth would you even do with a couple of million when you retire and have maybe 20 years left to live? Make long term investments lol...
Thoughts?
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Tue Jul 04, 2017 12:22 am |
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oldguy
Senior Member
Cash: $ 751.85
Posts: 3656
Joined: 21 May 2006
Location: arizona
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quote:
So If I was contributing 18K a year, with the company match that would be 18000 + 18000*.04 + (18000*.06 - 18000*.04)(1/2) = 18,900. Now I've heard it's reasonable that you can "double your money" with this free money (lol). So lets assume this is the case.
Skip the 'match' for now, I'll explain it later. If you invest $18000/yr and select the 11%/yr return product inside the 401k plan, you'll have $3,976,000 in 30 years.
OK, back to the match. Say that the match is $900/yr, as you calculated (and that is a fairly typical plan) and you invested $18,900/yr @ 11%/yr, that would be $4,175,000 in 30 yrs.
quote:
I believe debt is the devil.
It's best to set your beliefs aside and and do the math. Risk analysis and risk management are very important parts of investment decisions. You are right about debt in the case of consumer revolving loans - credit card loans, clothing store loans, etc. Conversely, amortized business loans are often the basis of building wealth.
Eg, with my rental houses, I often refinanced the loan and removed the equity, did that multiple times during the 35 years that I owned my rental houses. Say that I refi'd and removed $50,000 of cash. My new house payment was $300/m higher ($108,000 total over 30 years). I take the $50,000 "cash-out" and invest it at 11%/yr for 30 yrs, that equals $1,150,000.
See my point ? - I borrow $50k, pay an extra $58,000 in interest, and grow the extra $50,000 to
$1,150,000. Anytime you can borrow longterm capital at 4% , and place that capital at 11%/yr, the power of compound interest will work wonders for you.
quote:
I remember the calculator telling me I would pay some like 370K for 200K house which is insane!
lol, yes, that appears insane - but it makes perfect sense to do that very thing. You will be paying about $170,000 for the use of that $200000, for 30 years. That means that you won't be spending your saved up $200k for a house, instead you will be retaining the use of that $200,000 and you can invest it at 11%/yr, some in your 401k, some in your brokerage account. ($200,000 at 11%/yr equals about $4.6M).
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Tue Jul 04, 2017 3:32 am |
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marketsignals
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Location: Malaysia
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Tue Jul 04, 2017 9:08 am |
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braje
Member
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Posts: 22
Joined: 09 Jul 2011
Location: Anchorage AK
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You only have to contribute 3960 to get the full match.
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Tue Jul 11, 2017 3:31 am |
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