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Faster way to ER
Old 07-03-2013, 08:09 AM   #1
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Faster way to ER

I am trying to figure out what will get me to ER faster. Should I use extra cash to invest or pay down debt?

Debt being a mortgage and mortgage on a rental house.

Investing would be adding to Dividend reinvestment plans.

Thank you for any suggestions.
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Old 07-03-2013, 08:24 AM   #2
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Paying down debt is a form of "investment" in that the net interest you are not paying as a result of paying down debt is the implied rate of return.

Back in the 1990s, I was faced with the same question you faced. I had a one-year adjustable rate mortgage whose interest rate was rising. What I did was create a spreadsheet which compared the net interest I would pay by retaining the mortgage versus the net interest/dividends I would receive by investing the money which is not going to pay down the mortgage. I remembered to include the important effect of income taxes on both the income from the investments and possible tax deductibility of the mortgage interest. Furthermore, I reviewed the tax effect on both the state and federal level.

The tipping point for me was when I discovered that I would be able to switch from an itemized deduction to the standard deduction on my state income tax return, thereby creating a floor for my deductions. This reduced the income tax increase as a result of paying down the mortgage through losing the mortgage interest deduction and made it a better deal financially to pay down/off the mortgage.
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Old 07-03-2013, 08:47 AM   #3
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Paying down debt is a form of "investment" in that the net interest you are not paying as a result of paying down debt is the implied rate of return.
Right, and as you mention, you can do the math.

In many cases, paying off mortgage (if it is a good rate) won't win. Credit card debt paydown always wins.

We paid off our mortgage anyway, even though math wasn't on our side. Why? Peace of mind. I swear that had dividends of its own. Once we were debt free, we relaxed and somehow just started saving a lot more. Also enjoying life more.

There's a human element to being debt free that just may get you to ER a different way. Maybe you'll realize you need less. Maybe you'll just be nicer at w*rk and get a raise. I don't know...
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Old 07-03-2013, 09:01 AM   #4
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The answer to your question is "it depends", but when doing the analysis, remember to adjust for risk. Paying down the mortgage provides a guaranteed rate of return, i.e., it's a risk-free investment. There are some investments (e.g., stocks) with higher expected returns, but these carry a lot more risk than paying down the mortgage.
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Old 07-03-2013, 10:55 AM   #5
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Lots of factors. This is one topic that gets discussed a lot and there are many pluses and minuses to consider based on your particular circumstances. For example, the liquidity you would lose by paying off the mortgage. If you are still working, how secure is your job? How big is your emergency fund? How big is your monthly mortgage, is it 700 or 3000? If you lose your job, for how long would you be able to pay it? Do you believe rates will be going up significantly, making a CD more attractive? How comfortable are you with risk? Do you have kids that will be going to college soon and you would like to help them? How do each of your actions affect their prospects for financial aid? What does your spouse think? If you don't pay it off, would you be spending more on an ongoing basis because you have money in the bank and would feel "richer"? How significant is the size of your mortgage vs your nest egg? I think you would probably want to take a set of scenarios and carry them through to their conclusion and see which one is more palatable to you. Going through them can help you gain an even better understanding of your finances and your approach to them. There are just so many factors that could be considered, and each of these factors may be more or less significant to you.
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Old 07-03-2013, 11:26 AM   #6
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One of the risks with paying down a mortgage is future inflation rate. If your mortgage is at 4% but inflation is at 5%, because you get to repay with devalued dollars, the longer you delay repaying the further you come out ahead.
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Old 07-03-2013, 11:30 AM   #7
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If your loans are in the 3% to 4% range it would likely make sense to invest instead of paying them off. Above that it depends on what your investments look like. You might consider the loan payoff as part of your bond allocation, reducing bonds in your investment portfolio. Or you might leave your portfolio AA as is, which would raise the bar on the interest rate at which it would make sense to pay off the mortgage.

The tricky part is as mentioned, the mortgage is almost guaranteed (if your don't move or refinance or change your tax situation), and your portfolio return is not. Also, once you pay off the portion of the loans used to purchase your house the tax treatment is not quite as favorable.
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Old 07-05-2013, 06:44 AM   #8
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I agree on the primary factor is interest rate, but given it is a low mortgage rate of recent times another consideration is how close you are to ER. I see benefit of reduced expenses in retirement of mortgage payoff, if retirement is further out I'd prefer investment so cash growth thru compounding can build your resources.
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Old 07-05-2013, 07:33 AM   #9
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Originally Posted by Paws View Post
Should I use extra cash to invest or pay down debt?
Given that your mortgages have low interest rates and that you're a fairly savvy investor, it's not likely to matter much in terms of accumulating wealth for FIRE. Either path has its own pros and cons, as several folks have mentioned already.
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Old 07-05-2013, 07:35 AM   #10
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I agree with this.
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Originally Posted by GrayHare View Post
One of the risks with paying down a mortgage is future inflation rate. If your mortgage is at 4% but inflation is at 5%, because you get to repay with devalued dollars, the longer you delay repaying the further you come out ahead.
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Old 07-05-2013, 09:21 AM   #11
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Originally Posted by Which Roger View Post
The answer to your question is "it depends", but when doing the analysis, remember to adjust for risk. Paying down the mortgage provides a guaranteed rate of return, i.e., it's a risk-free investment. There are some investments (e.g., stocks) with higher expected returns, but these carry a lot more risk than paying down the mortgage.

We paid ours off with an inheritance in '99, and have NEVER regretted it. It allowed us to save the monthly mortgage pmt., invest it, and (combined with other aggressive savings and conservative investment approaches), ER in 2012 (about 3 yrs. sooner than expected). In our situation, the peace of mind was priceless, as my husband has a disabling lung condition which we feared could require an early retirement.

He actually worked longer than expected; but we could not put a price on enjoying this house for as long we like, downsizing when it fits our schedule.

Plus, I remember reading the spreadsheets that showed how much interest we would be paying the bank over the life of the mortgage. It was in the hundreds of thousands. So, when we eliminated that bank debt from our future, we chose to put those dollars into our own pockets instead.

We did, and it worked. So, it has felt like a 14-year coup de grace. I feel like a "little guy" on Main Street, USA, who "beat the system." Rather than lining the banks' coffers, we lined our own.

Granted, this is not a rocket science investment approach. But it has served us well.

Best of luck with your decision!

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Old 07-06-2013, 06:28 AM   #12
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I argue internally with myself all the time over this question, especially since my taxable investments are almost enough to payoff the house. I recently settled on a 7 year, 2.75% home loan and said I'll split the difference.
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Old 07-20-2013, 01:49 PM   #13
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Why not do both? According to your interest rate, you could go half and half, or one third and two thirds. That would be the ultimate hedge.

My debt history is different than most. Ten years ago when we built, our house cost $120K. [this is a low COL area] We had saved half of that and got a loan from my mother for the other half, @ 3.2%. It didn't make sense for us to pay off early, as my sister had got a loan for the same amount, and she was not paying off early. If Mamma had died before the loans were paid, we would have lost out on any extra we had paid. [there was no signed contracts, just a schedule of payments]

Three years ago we added on to the house. We paid $60K in cash for the addition. Then two and a half years ago, Mamma forgave the last $20K of the loan. It was the best Christmas present I had ever had.

We are liking being debt free better than not.
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Old 07-20-2013, 07:47 PM   #14
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I am trying to figure out what will get me to ER faster. Should I use extra cash to invest or pay down debt?
What is your time-frame for ER? The longer away it is, the more comfortable I'd be in putting extra cash in investments vs. paying down debt.

But really the fastest way to ER is to concentrate on cutting your expenses given the implied multiple from SWR studies.
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Old 07-20-2013, 08:40 PM   #15
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Debt always comes first in my book.

1. Financial: Not only to you save a ton of money on the interest you would've paid over time, but once it's paid off, you have all that money freed up (that would've gone to your mortgage) to invest, rather than to just feed the loan.

2. Emotional: You will feel more financially independent, once you own your own home, free and clear. In addition, having all that extra cash on hand every month will make you feel more wealthy and financially flexible. And although this is purely a personal reaction, I dislike the feeling of being in debt to someone else. It is the antithesis of the freedom I value.
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Old 07-20-2013, 09:19 PM   #16
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The other point to consider is that how many years you are into your mortgage. If you just started, it may make more sense to pay off since mortgages are front loaded and a big chunk of your monthly payment goes to interest payment.

Overall, I think it is more of a personal decision that you need to make. My wife and I thought our mortgage as chain & a ball since we want to travel/live overseas for a few years. We always paid a little extra each month towards our mortgage from the beginning but accelerated our payments in the last 2-3 years. All said, we paid off our 30 years East Coast mortgage in about 6 years in 2012. The feeling of paid off mortgage is also great I should add.
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