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sr17859
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| Hey Everyone! I'll just jump right into it. |
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Our primary goal is to pay off CC and 1 car loan. That will take us 1 year. Then where do we go from there? Extra mortgage payments? Invest in 401k?
Last edited by sr17859 on Mon Jun 06, 2011 12:28 pm; edited 1 time in total |
Sun Jun 05, 2011 6:11 pm |
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oldguy
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quote:
Then where do we go from there? Extra mortgage payments? Invest in 401k?
Definitely NOT the extra mortgage payments, mortgage rates are at a 50 yr low, that is some of the cheapest capital that you will ever borrow. Wealth building requires investing in appreciating assets (and avoiding depreciating assets). If you invest $500/m in a 11%/yr investment fund it will be $1,350,000 in 30 yrs. That will be way more important to your future than a prepaid house (and it will be paid for in 28 yrs anyway).
Whether you invest the money in a taxable account, a Roth account, or a 401k account isn't too important, that merely changes how it will be taxed when you retire - the important thing is to get it invested at 11%/yr for a longterm.
Why is the goal to prepay the car loan? Do you have a toxic interest rate? We 100% finance our cars for 60 months, credit union loans are running under 6%. Retain the use of that capital if you can.
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Mon Jun 06, 2011 1:24 pm |
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sr17859
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what about the interest paid over the course of the mortgage?
Our payment is $1081 if we double that a month we could pay off a 141000 in roughly 5 years
My Employer matches a 401k starting in January.
The reason i suggest prepaying mortgage is when I have children I want to stay home until they are school age and not having a mortgage is a serious burden off that situation.
Carloan is $588 per month. Paying that off frees up alot of money. Paying that off alone leaves me room to invest the 500 AND pay double mortgage.
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Mon Jun 06, 2011 4:13 pm |
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oldguy
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quote:
Our payment is $1081 if we double that a month we could pay off a 141000 in roughly 5 years
Yes, double payments would take about 5.5 yrs and the interest cost would be $27,000. If you keep the loan (about 17 yrs left?) the interest will cost $75,000 - ie, and extra $50,000.
If you keep the loan, and put the extra $1081/m into an 11% fund for 17 yrs, it will be about $640,000. And the house will be paid off. I would rather pay an extra $50,000 for the use of the money, and have the $640,000 in the bank.
quote:
not having a mortgage is a serious burden off that situation.
Carloan is $588 per month. Paying that off frees up alot of money.
I think that you are forgetting that the money used to prepay debts has to COME from somewhere. If you payoff a $141k loan and a $20,000 car loan, that means that $160,000 is NOT in your bank, ie that $160,000 came from your earnings.
If you are going to quit work and stay at home for a few years, wouldn't it be safer to have 1600/m payments AND $160,000 in the bank than to have a paid-for house and no money? Remember, if times get hard, no one can loan you food/gas money when you have no income, it won't matter that you have a house.
In any case, be sure to contribute enough to the 401k to get the full match, that is free money that you need to accumulate for your family.
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Mon Jun 06, 2011 5:13 pm |
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sr17859
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Car loan without prepaying will be paid off in 1 yr 3 months. So that's a matter of a few payments.
Where would I get an 11% fund? And could it be accessed If need be. Isn't that what a emergency fund is for. Or do you prefer do have them be one in the same?
I agree 50000 in interest is worth what will be in the bank.
In my mind the money to prepay comes from the money that is already paying our CC and car.
I might add we are 22 so we have time on our side. Just trying to figure out what is best given I have ample time.
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Mon Jun 06, 2011 5:55 pm |
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littleroc02us
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quote:
Originally posted by sr17859
what about the interest paid over the course of the mortgage?
Our payment is $1081 if we double that a month we could pay off a 141000 in roughly 5 years
My Employer matches a 401k starting in January.
The reason i suggest prepaying mortgage is when I have children I want to stay home until they are school age and not having a mortgage is a serious burden off that situation.
C
Regardless of how much money you might make or not investing, peace of mind is what you seem to be looking for so that you won't have the burden of a $1081 payment each month on the house. You can still retire wealthy by investing heavily with the money your saving from no mortgage payment. Staying home to raise your family is important and retiring on a couple million and a paid for house instead of 4 million and a ton of debt you'll be o.k.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Jun 06, 2011 7:02 pm |
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sr17859
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Your exactly right however my question is how much more is there to be made by investing rather than paying off the mortgage? Given the 5 years until I'm 27.
If given that number I can determine if that is worth it or if having peace of mind in the coming years is.
What kinds of investments get 11%?
I like the idea of annuities.
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Mon Jun 06, 2011 7:35 pm |
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oldguy
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quote:
however my question is how much more is there to be made by investing rather than paying off the mortgage? Given the 5 years until I'm 27.
If given that number I can determine if that is worth it or if having peace of mind
As a general plan, most of us are given about 30 or 35 yrs for wealth building and then we must switch to wealth preservation. The reason is that the longterm wealth building investments are volatile, they are suitable for a young person who can wait out the economic cycles of markets (both real estate market and stock market). So for that 30 to 35 yr period you invest in 11%/yr investments. And then you slowly transition down to 8%, 6%, 4%, and so on, so that a market crash won't affect you much when you are age 60 or 70.
In your case, age 22, if you could invest $1000/m at 11%/yr that will be a million at age 44, $3.7M at age 55, $6.3M at age 60. As you can see, if you postpone for 5 yrs, then you will have $3.7M (not $6.3M) at 60 when you must switch to w-preservation. As you said, you have lots of time.
A key point is to not try to kill yourself saving money or working OT to earn more money - instead, concentrate on properly directing your earnings. Think of your income stream as fixed - and your operating budget as fixed (leave room for lattes and movies & fun together). Set aside a fixed investment amount and make it your family priority. We found that having the $1000/m invested automatically gave us the peace of mind of knowing that we were On-Track to be millionaires - so we were free to enjoy spending everything else that we earned on family fun.
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Tue Jun 07, 2011 12:45 am |
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sr17859
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Thanks for all the great advice I'm posting a copy of this on my fridge !
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Tue Jun 07, 2011 12:58 am |
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psteve710
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Well said OLDGUY...you must be very smart...I have seen most of your replies.
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Wed Nov 02, 2011 6:26 pm |
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