25 May Money advice you should question. hard.
Warning: these may upset you, love.
They go against many of the standard issue things you have been taught and *on the surface* make logical sense.
Except, you are not standard or surface; more like purposeful, smart cookie, powerful and strategic.
Disclaimer: I have lived both sides of what I’m saying here. The popularly touted strategy and the alternative I offer you.
I am NOT a licensed financial planner. But I’m also not earning a commission or benefitting from your choices.
And I retired myself at 40 with a high school diploma, so there’s those.
Popular Personal Finance Wisdom to re-examine
Get a 401K, STAT, then max out your contributions.
The issue with that:
You have no way of knowing exactly what your tax rate will be when you pull money out of your 401K in your golden years (see below chart for how tax rates have swung wildly in the last 100ish years).
Can you predict what the investments contained within the 401K will do with any level of accuracy? Can you even pick out which investments you believe WILL perform or are you offered a limited selection? AND: can someone explain to you the fees, exactly, AND how those will negatively compound, affecting your end balance?
These 3 factors: future retirement tax rate, which investments it contains (and their performance) and the fee factor drastically affect the performance of this asset at the time of life when you can’t be f*cking around.
Roth IRA: Yes, you contribute and pay tax now at today’s rate but this eliminates one unknown variable (what will my tax rate be when I withdraw?). Check that chart again. All earnings grow tax free with a Roth.
Wait – what if my employer matches me!!?? I get you. I simply cannot turn down free money, either. Contribute only up until the match. Put the rest somewhere else.
Load up your Matched 401K investment and your Roth IRA with Inversely Correlated Assets to hedge your risk and diversify yourself a bit more.
Put any and all extra money toward paying down your debt.
The issue with that:
What will you use when your transmission takes a sh*t, you get injured and need to meet that deductible, your dog needs surgery… Credit in some form, that’s what.
The staying stuck in the perma-debt, running ’round the hamster wheel continues.
Take your current total monthly debt payment amount and funnel 20% of that into an emergency fund that is not linked to your regular bank account or Venmo OR is super convenient to get at in any way: those funds are strictly for emergency use.
Have it taken directly from your paycheck so it happens, without fail, before it hits your hot little hands.
Take the balance of your remaining monthly debt payment amount and use the Debt Snowball or RDRP (rapid debt repayment plan) method to strategically and quickly pay down your debt. These employ calculators or spreadsheets (DO NOT let that intimidate, it simply means there are tools that do the math for you) where you input the amounts owed, minimum payments and interest rate to create the best plan for YOU. Google them, my love. I’m not smart enough to create such a thing myself + they exist a’plenty. Game changer when implemented.
Beefing up your emergency fund, knocking out your silly consumer debt and creating true & lasting financial strength feels SO.MUCH.BETTER than any short term purchase ever will. So you no longer use credit to buy “stuff”. Commit.
Pay off your mortgage early/ASAP!
….I think this is the one we will disagree MOST with. Will you read on anyway :-)?… I hope to at least show you there is another side to the $0 mortgage goal.
I KNOW how good this one feels. I have $0 mortgage balances. But…
The issue with that:
Liquidity: Let me tell you what does not feel good: when you need money but the financial markets are tight and no one is doing cash out loans. All of your net worth is tied up in an asset you can’t sell (because it is also where you sleep). The money you CAN borrow in this scenario will likely be at a much higher rate than what your mortgage % was. “But I’ll never need to do that”, one might think. Pandemics. Life saving procedures not covered by insurance, bail. Sh*t definitely happens.
Losing all your eggs: Or when the market tanks and you have to sell your house for less than what you paid for it. You lose the difference forever. At least with a mortgage, a short sale is still an option (albeit a bad one).
Lawsuits and creditors: a paid off house is a juicy asset waiting to be plucked up by a hungry lawyer in a worst case scenario. Do you see all those lawyer signs about town? This is a profitable business. No one wants a catastrophic accident but smart cookies put a strategy in place, just in case.
Spread: put another way, how efficiently is your money working for you? When you pay off a 4% mortgage, you have locked in a 4% return on that money. Let’s pretend for a moment you could get an 8% return somewhere (we do). What if you put the “extra money to pay off the mortgage” into the 8% investment vehicle instead? Can you see how you *could* make better use of the cash in this scenario?
Get your house a homestead exemption, yesterday. Most states offer this protection to homeowners. It offers creditor and lawsuit protection for the equity in your home up to a certain amount (here in my state of Nevada, it is $605,000).
Create a plan that gives you OPTIONS. If you needed money, where would you get it? Perhaps you take out a Home Equity Line of Credit as a compromise? Assuming this will never be a need is not a smart cookie move (or realistic).
Crunch the numbers and compare all of your options of where you could put that extra $100 a month (or whatever your ‘pay extra to mortgage’ monthly amount is). Bump it out 5, 10 years and compare the NET amounts.
Give it all a think and chat, argue with me in the comments?