Credit Card Debt
If you’re a new reader, let me start out as usual by explaining the credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn 3-4% interest or more, and keeping the difference as profit. Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the credit card balances off, I choose not to.
Retirement and Brokerage accounts
We added another $3,048 in 401(k) contributions, which given the numbers above means our retirement accounts actually lost about $1,000 in value. YTD performance numbers are… not good. I just hope that the prices stay low until I can start buying again now that I am done with the Emergency Fund.
In my brokerage accounts, I sold all of my “play money” stocks (only valued at ~$2,000) and instead participated in a minor arbitrage attempt. It worked out well, I made a gain of 10% in 17 days. It’s all in cash now and I again have no position in individual stocks at all.
Cash Savings and Emergency Funds
Our mid-term goal is to have $30,000 in net cash put aside for emergencies, for example if both of us find ourselves unemployed for an extended period and even have to start paying for things like health insurance on our own. We are basically done, with about $500 to go. Now to find better uses for our incoming cashflow.
Home Mortgage
Another ~$500 of loan principal paid off. I am debating whether to start paying extra towards my mortgage right now. In my mind, it would feel nice to have a home paid off as part of my grand early retirement plan. However, I also like the idea that such a long-term loan at <6% can act a nice inflation hedge. Besides healthcare costs, I view unexpected inflation as another scary unknown for early retirees.
You can see our previous net worth updates here.
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Good progress! Even if your retirement accounts went down a bit, you’ve managed to save a great deal of cash for that emergency fund.
Hopefully I’ll be where you are when I’m your age 😉
That is a very impressive emergency fund. Do you keep it in an online savings account? Some people argue that an emergency fund isn’t necessary. You can put that money to better use. .It is unlikely that you will have an emergency,etc. There are pros and cons of course to this obviously.
I would like to read more about how you balanced the emergency fund/home purchase issue. How much did you drain your cash position to buy a house? I was enthusiastic about our own down payment kitty until I realized that actually using it would leave us without an emergency fund. How miserly did you get in order to build an emergency fund up again?
Also, isn’t a paid-for house also a great hedge against inflation? Why is paying interest on a mortgage a better inflation hedge than, well, not?
Impressive progress Jonathan!
If I recall, a part of your side income comes from online surveys. Do you know if the payments from online surveys are considered as taxable income that should be reported to IRS? Or is it considered rebate and not taxable (like the cash back from rewards credit cards and such)?
Thanks.
A paid off house that lowers your month to month expenses is a good emergency fund on its own.
I am interested in learning how you find out about the arbitrage opportunity? I am trying to build an arbitrage strategy, but so far I only find ways to earn the same return as with a similar CD, while taking a lot of risk..
I would also include learning how to sail. That has always been my dream. At one point I wanted to build my own sailboat. Yes, that’s right I am a little crazy to even think something up, It just sounded like fun though.
You need to update your net worth bar on the top right of the main page.
Don’t invest with emotions!
I know it would feel GREAT to pay the house off quicker, but at 6% interest you can put the amount of the extra payments into an index fund, hopefully earn around 10% on average.
Eventually (if you want), sell some or all of the index fund and use the proceeds to pay down/off your mortgage.
I highly recommend you do not pay off your mortgage early – especially because you have such a low rate. You should keep your mortgage as long as humanly possible.
You’re playing the credit card rate arbitrage game (which is awesome btw). This is almost the same thing, just with much more money and different rates. If you’ve already maxed your tax advantaged accounts then you have to beat 6% return (pre-tax!) which a good diversified portfolio of low cost index funds should be able to do (with some risk obviously). The other major factor is that you’ll keep that money much more liquid if you invest it rather than paying off the mortgage. If you have the opportunity to put this money into a tax advantaged account then you only need to beat 4.2% which the market is virtually certain to do over the long term.
Summary:
You haven’t maxed your 401(k), IRA, etc:
Do not pay off your mortgage!!! You can obliterate the return with sensible low risk investing.
You have maxed your 401(k), IRA, etc:
Do not pay off your mortgage!!! You can probably still beat the required return through sensible investing and you keep the money much more liquid!
I think you should also post your age and target retirement age on these monthly updates. It helps get a sense of where you are in the process for casual readers.
Or you could post your target retirement date if you don’t feel comfortable listing your age.
I gotta agree with the poster above me about your mortgage. There is one more point he didnt mention: mortgage tax advantages. In the long run you are better off to keep your money more liquid, and keep the inflation hedge/tax deduction of the mortgage.
Oops, I didn’t specify where I got the 4.2% from… You only need to beat 4.2% because mortgage interest is tax free so you need to beat:
(1 – 30%) * 6% = 4.2%
Assuming the money is going into a tax advantaged account. If it’s a regular taxable account then you have to beat ~6% pre-tax (less if long term cap gains stays low – but it likely won’t)
How come the graphic of your net worth in the upper right corner doesn’t change with your monthly updates?
hi jonathon. so, i know this is not completely rated but i have a question for you and your readers…
my boyfriend and i would like to purchase a house together. when the house is purchased and all is done and said, who gets to claim it on their taxes? because we are not married, i have been told that only one of will get this luxury.
please advise!
Great progress, I’m a new visitor to your site, and I’ll definitely be coming back 🙂
he is 29
https://www.mymoneyblog.com/about-me-about-mymoneyblog
I always find it amusing when people argue that not paying off a mortgage is always the best move because you can “probably” get a better return somewhere else. Such as, “you can make 10% in the stock market!” Last time I checked, the only guarantees were death and taxes. And a house, as a liability, is a guaranteed payment you will be making for many years, essentially a tax that you are paying every month, to the bank (and to yourself via principal). Might paying off a mortgage early end up, in hindsight, to have not been the optimal financial move? Of course. But who knows? How many people can you think of that paid off their mortgage and wishes they hadn’t? In fact, how many people do you know that have a paid mortgage? Instead, how about people who took huge mortgages and invested the money, hoping to game the system with double-digit returns and make it big? The latter scenario seems to be the case 99% of the time, as evidenced by the current credit issues.
The other common argument is liquidity. Let’s say you work and pay off your mortgage instead of investing. Now you lose your job. Are you worse off than if you hadn’t paid off your mortgage? Probably not, since you don’t have a mortgage payment. The fewer expenses you have, the less liquidity you need. But what if you lose your job when you still have your mortgage? Well, if you have an emergency fund, it’s no big deal. That’s why he’s got the $30k stash.
Do you think wealthy people have mortgages on their primary residences? Why do you think that is?
I think that your finances would be more accurate if you priced your home according to the Case-Shiller Home Price Index. This myth of “It’s different where I live” is totally delusional. Also, if you had waited a few more months to buy a home, you would get the nice $7,500 tax credit included in the recent and foreseeable bailout.
Re: $7,500 tax credit. I realize that is what it is being called throughout the media, but I think calling it a ‘tax credit’ is a bit misleading. It is an interest free loan that you have to start paying back two years after the credit is claimed ($500/year for the following 15 years or as soon as you sell, which ever is sooner). Also, I’m not sure if Jonathan would meet the income restriction either as the benefit starts phasing out at 75,000 for single and 150,000 married filing jointly.
Looks like you had a nice month even considering the losses in the market.
One way to look at mortgage and be happy is not only do you have cash when you need it but you are trying to buy inflation. Assuming today’s 4% inflation rate if you have a mortgage at todays 6% you are really paying only the difference – 2% minus ofcourse the tax advantages you will receive to itemize the interest.
A $10k in principal paid towards your house is $600 for a year or going to reduce your monthly installments by just $50.
That’s the practical approach. If you get sentiment in between you will have a pleasure of mind by getting mortgage completely off but remember you still need to pay insurance, property taxes and other things!
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I just recently subscribed to this blog, and I must say that I am impressed. I just turned 22 years old last month and have plans on retiring very young also (before 30). I have the plan all worked out and have started to implement it starting this month. But what is really cool is that I would really love to document my progress, just like this blog does. The problem is that I am not sure how to get it started. I would appreciate some advice on this process(if possible).
Thank you Brian!!!
It makes my spine hurt every time I hear of people hanging onto mortgages as if they’re some type of asset. They are a L-I-A-B-I-L-I-T-Y!!!
I’ll hang onto a mortgage when they start offering 30 year/0% versions!!
🙂
@Brian
Of course there is risk involved – as there is with any investment. Do you seriously think that investing in your house isn’t risky? Look at what is happening now in the housing market. By keeping your money out of your house you avoid that risk and take on the risk of your alternative investment (most likely the stock market). The fact is that for most people and situations, keeping your mortgage and investing in a sensible balanced portfolio gives a much better risk / reward combination than paying off the mortgage.
Also, the current credit issues have *nothing* to do with people investing in the market instead of paying off their mortgage. It has everything to do with people buying houses they can’t afford with adjustable rate loans that are fine for them right up until the rate adjusts.
The traditional dogma has always been that you should pay off your mortgage as quickly as possible but mathematically it just doesn’t work out that way (for most people with good mortgages).
I think the choice of paying off your house mortgage is “it depends”
Some people would love to have it paid off while others think there is a tax advantage. Consult with your tax strategist and put together a plan.
Are even “sensible and balanced” portfolios returning anything these days? You can get 3.5% guaranteed from online savings. Sure it’s not even keeping up with inflation, but it is at least a positive return. The market may continue to tank for years. I would continue to channel into savings or pay off that house asap.
History has shown that the markets out perform housing. If you index housing for inflation….. Over the last hundred years it has done .4% better then inflation. The Markets on the overhand are near 6 to 7%. Since a house is suppose to be a long term investment (not a get rich quick scheme that we just saw) You should only pay off your house early if you are already maximizing your other investments. (And I still probably wouldnt pay it off if I was making that much)
Thanks for all the comments, it should supply me lots of post ideas! I wish I could write more, but I’ve been kind of under the weather
One quick note – Whether you pay off your mortgage or not has no bearing on your exposure to changes in your home’s value. If your house value goes down by $100,000, you lose $100,000 in equity regardless of if you pay off your mortgage early or not.
Interesting…..