Save LOTS of Money in the Long Run

[disneysteve]

Scanner, municipal bonds are liquid assets. All one needs to do is phone the broker, or enter a sell order online, and you'll have the cash in your account in a day or two. Accessing your home equity can be more difficult and costly.

If I run into financial difficulty, the last thing I want to be doing is taking on more debt and borrowing against my home.

So your mentor's method isn't quite the same as prepaying your mortgage, even if the monetary return is about the same.

I'd much rather have a stash of municipal bonds that I can draw from as needed than a paid off mortgage from which I can't easily access cash. Sure, I could open a line of credit, but then I'm paying interest to get at my own money.

[Scanner]

Oh, yes, DisneySteve, I realize that. . .but the philosophy still applies.

He led a debt-free lifestyle in addition to having the liquid assets of muni bonds.

For those of you "working for the man", you probably should go out and take risks with your portfolio. You have no risk, other than being fired, to your income. None of you had a $25,000 business loan like I did that could be held against you in the form of a judgement if I couldn't make payment.

So. . .it's appropriate to take market risks.

For the self-employed, paying down a house makes a lot of sense - that's all I meant. My mentor just took the philosophy a step further with his savings/investments.

[disneysteve]

For the self-employed, paying down a house makes a lot of sense - that's all I meant. My mentor just took the philosophy a step further with his savings/investments.

Again, I think there is a fundamental difference between investing in municipal bonds and prepaying the mortgage. One (bonds) creates an easily accessible source of funds if needed. The other (mortgage) does not.

I say invest the money. Choose a conservative investment if that is most appropriate to your situation. Do that at least until your investments grow to match your mortgage balance. Then, if you choose, cash out the investments and pay off the house. That gives you the best of both worlds. During the years prior to paying off the house, you have a stash of money to draw from if needed without having to tap the home equity. Then, once the mortgage is paid off, you free up cash flow that can then be invested however you choose.

[Aleta]

Recently, I heard Suze Orman say that she would rather see people contribute their money to a Roth IRA that is after tax, grows tax free and after a certain age, can be taken out without penalties. Her point was that you could put the same money into your Roth that you would into your house and when you retire, pay the house off with some of your Roth. That would give some their interest portion to deduct from their taxes. I had never quite heard it like that. It was on her show last Saturday night.

I also think that it also depends upon your age when investing in Roths. If you're too close to retirement age, it doesn't make sense to do that. Also, some people live in states where their home can't be touched in bankrupcty and one can only put a lien on a house with a lawsuit. For some, owning a home is a saft haven for their money. Ask OJ Simpson why he moved to Florida?

[Scanner]

DisneySteve,

Yes, there's a fundamental difference between prepaying a mortgage and buying muni bonds.

But. . .you would have to agree that both investment executions are rather conservative. . .maybe even ultraconservative by some.

This fellow never owned an equity in his life - he just maintained debt sector investments.

All I am saying is to take risk in a broader context than just the usuals - market risk, principal risk, inflation risk.

There is such a thing I would call "career-risk" or "business-risk" in cases like his or mine.

If you are assuming a lot of business-risk, doesn't it make sense to prepay your mortgage?

For one thing, it's my understanding that a house can't be seized in a bankruptcy proceeding. In my case, I think I am even protected in a malpractice award exceeding my policy limits ($1,000,000/$3,000,000) I am not sure about Roths and if they can be seized or not.

I think only a person who's ever been self-employed can fully grasp the entireity of the decision and that's why this person hit a Bingo with me. If you haven't ever been self-employed, the thought probably seems foreign.

[disneysteve]

Recently, I heard Suze Orman say that she would rather see people contribute their money to a Roth IRA that is after tax, grows tax free and after a certain age, can be taken out without penalties. Her point was that you could put the same money into your Roth that you would into your house and when you retire, pay the house off with some of your Roth.

This makes some sense, but I'm of the opinion that your retirement accounts should be used for retirement and nothing else, barring some unforeseen catastrophe. I don't have a 401K or 403B or pension or any other employer-sponsored plan. All I've got is my Roth. If I pull money out of there for anything other than retirement living expenses, I'd be in serious trouble.

[disneysteve]

For one thing, it's my understanding that a house can't be seized in a bankruptcy proceeding. In my case, I think I am even protected in a malpractice award exceeding my policy limits ($1,000,000/$3,000,000) I am not sure about Roths and if they can be seized or not.

This is a very good point. I honestly don't know how that works, but that could certainly be a consideration in certain circumstances that would tip the scale toward paying off the house rather than investing. If the home equity is protected from creditors while the investments are not, that is a big deal.

[Ima saver]

Actually, we had 3 types of savings account at the little building and loan. We had daily interest, which paid 5 1/4%, regular (called optional shares) that paid 6% and c.d.'s whose rates changed, but never went higher than 8%.
We had no computers back then, so interest was figured by hand. Therefor you only got interest on your regular savings (6%) if you left your money in for the entire month.
Yes, you could buy a very nice house in the late 70's for about $40,000. At that point, I was working for $89 a week as a bookkeeper and my husband made $4 an hour designing house plans.

[scfr]

Thanks, Scanner. What did I win?

I probably should clarify that while we were paying off our mortgage, we were continuing to contribute the maximum we were allowed to our tax-deferred retirement plans. (And those tax-deferred retirement plans became quite a bit more conservative after we became self-employed.) And, after DH started his own business, we stopped putting any non-tax-deferred money in to mutual funds; it all went to CDs, MMAs, Treasuries, or paying down the mortgage. Why? Because, as I said, we were taking plenty of risk in our own business. When we looked at the comparative returns, and when we took a clear-eyed view at what we were actually saving in taxes by itemizing our deductions vs. taking the standard deduction, for us it was a no-brainer to pay down the mortgage. [I think many people over-estimate how much they are saving on their taxes by having a mortgage ... But that's another debate.]

I realize my situation (and Scanner's and Ima Saver's) are a bit unique, but we do illustrate why you can't say this is an either/or situation. It was the best thing for us to do, but I can't say that makes it the best thing for everyone to do.

And just because Money magazine says something doesn't mean everyone should blindly follow their advice. In a recent issue on wealth in America, they said that the surest road to wealth was owning your own business. As true as that may be, I understand that the entrepreneurial lifestyle is not for everyone. I would never say that just because Money magazine says it, everyone should quit their jobs & start their own company!

[scfr]

This is a very good point. I honestly don't know how that works, but that could certainly be a consideration in certain circumstances that would tip the scale toward paying off the house rather than investing. If the home equity is protected from creditors while the investments are not, that is a big deal.

This is actually something we weighed as well, and I can imagine it would be a much bigger consideration when you are in the health care field and exposed to the possibility of a malpractice lawsuit.

[disneysteve]

And just because Money magazine says something doesn't mean everyone should blindly follow their advice.

I agree 100% and hope I didn't imply otherwise. I don't think any "expert" gives advice that applies in every situation.

Money did say, "Paying down the mortgage earns you a risk-free 4.5 percent. That's as good as you'll do with Treasury bonds. True, and if you are investing for a near-term goal and don't want to take any risk, you can make a stronger case for prepaying your mortgage."

So they did acknowledge that prepaying the mortgage can make sense in some situations.

[Aleta]

Disney Steve: I wanted to clarify what Suze Orman was saying. She said that to always max out your retirement plans but that if you contributed your money to a Roth, that it could grow tax free. (Unlike our Vanguard Index funds that we pay taxes on our dividends). She was saying that above your retirement that by putting that money into the retirement fund that you could pay off your house at retirement. I don't think she was saying to take your retirement savings and pay off your house.

[Scanner]

Large IRA's not fully protected from bankruptcy or lawsuit seizure?

Whoops. . .after reading this article - all IRA's seem to offer some protection courtesy of President Bush.

[disneysteve]

Disney Steve: I wanted to clarify what Suze Orman was saying.

Oh, I understand what she says. I watch Suze and think she generally gives good advice. I just don't happen to agree with planning to use Roth money for anything but retirement. The reality is that most Americans aren't saving nearly enough for retirement, whether it is in a 401K or Roth or whatever, and folks are likely going to need every penny in their Roth to support themselves in retirement. While it is true that contributions to a Roth can be withdrawn at any time for any reason without penalty, I think that is an option that should be reserved for a major emergency only.

[puck36]

I think that is an option that should be reserved for a major emergency only.

I do agree with you, but want to add one thing, that it should be only for a major emergency if your emergency fund does not cover it.