Tuesday, February 15, 2011

finance post: prepaying a mortgage vs. investing

if you have been reading my blog for very long, you know that i love finance, especially personal finance.  i've written on the subject several times including here on our kehrli family goals and here on budgeting and saving for college (and as a follow up--transferring parker's money market account to a fidelity fund = 23% growth since i wrote the blog post in june.  take that horrible interest rates!  note that i recognize this is a blessing and not something i can take any credit for as the market has very dynamic over the last several years and we just happened to invest at the right time).  there is so much freedom that comes from wise financial choices and it pains me to see to see others struggle with this topic (although i am by no means a finance expert or perfect in this area...and i might have just bought a pair of maternity jeans for over $100 and ordered unneccesary personalized elmo t-shirts as birthday party favors for all of parker's friends :)). 

anyway, as james and i were reviewing our taxes this year, we started talking about our financial plan for 2011.  as our income went up x in 2010, our taxes literally went up 4x, and i told james my #1 financial goal for the year was to reduce our taxable income for the coming year, mainly through increased IRA contributions.  james argued that he really wanted to use any kind of extra income to pay off our house faster and not worry about a little extra tax, and so began the debate...

i googled, "prepaying a mortgage vs. investing" and came across many interesting articles.  a majority of the financial experts agree that mathematically investing = higher returns (according to historical market stats).  some of the articles were almost humorous in their basic advice, i.e. it is wiser to pay off a high interest credit card debt vs. prepaying a mortgage (you think?), and then i found this article, which i thought was a refreshing view on the subject (ignore the website url, haha).

1. If you're asking yourself whether to prepay or invest, you're probably in pretty good shape.
2. Put away all pens and calculators and go for a walk with your spouse (this is not solely a math decision).
3. Do what you think is the best choice for your family and your life goals.

life goals, hm...my biggest life goal is to spend time with my family.  i've often felt trapped that as long as james continues firefighting, i will never be able to stay at home (which btw, i completely support him in this and am glad he loves his job and schedule).  however, after reviewing our finances more, we've created a plan to have our all of our debt paid off in 7 years.  with no house payment, car payment, or any other kind of debt, it doesn't really matter how much firefighters make because i know we can live on the wages (plus the amount of money we would save on taxes would almost be a 2nd income [not that we make a lot of money, but going from two incomes to one greatly reduces anyone's taxes]).  it is encouraging to know that if we continue on our current route, i can retire in 7 years!  there is light at the end of the tunnel.

how awesome would it be to have james work 24 hours shifts, and then come home to the kids and me for 48 hours (i'd be home all the time!).  we could get a family golf membership and play several days a week, go to the pool, volunteer more, have tons of time for family vacations, etc.  i could go to the gym while the kids are at school and actually have time to plan meals at night (which will be so necessary when i have a house full of hungry boys!).  oh the possibilities are endless.  so i think i've been swayed...for us the emotional rewards and freedom not having a house payment provides far outweigh a little extra money in retirement.  plus if our house is paid off and our kids' colleges are already saved for, the amount of money required for retirement should be much lower.

will all of this change?  probably.  who knows what life will throw at us, but having a plan for right now feels good and gives me hope.  on the days when i am jealous of other mom's staying at home, i know that my time will come. 

i am now 24 weeks along and have not done a single pregnancy post, ha.  baby kehrli #2, i love you!!  parker i love you, too.  thanks for being my fun-loving crazy man. 
until next time...go packers!!


cade said...

I support your plan 100% !!! I have no idea if you are Dave Ramsey fans or not but I hear him use these 2 questions/points often when this question comes up:

1) If your house was paid for, would you go take out a 100K loan to invest? Probably not.

2) 100% of foreclosures happen on homes with mortgages.

You just can't beat that AND the peace of mind it brings to not have any debt. Recently we've just been saving all of our extra income but now it's time to need to sit down and look at how many years it will take us. Thanks for the encouragement!

Marcia said...

Oops. I was logged in under Cade's account.

This is MARCIA. =)

kristina said...

hey silvy. you never cease to surprise me. i know i have said it before, but when we move to arkansas, i am seriosuly going to enlist you as my personal financial manager! i think your posts/advice is pretty amazing.

Melissa said...

i love reading your financial posts b/c this too is a passion of mine. we have a private blog we've been keeping about it for almost a year now. we definitely have some similar perspectives but i think we have some different ones too...i like hearing what you have to say though b/c the Lord has been challenging us in this area in some radical ways (you'd would probably think i'm a moron with some of our philosophies!!). great post!

Anonymous said...

What great goals! We are on a similar track. We will be debt free besides our house at the end of this year. Then it will probably be 3 more years to pay off our house. It is exciting to think about being debt free, but it does take planning and dedication. Good luck!

Erin said...

I am really glad that you posted this. When we spoke on the phone last week I almost brought this up, but I know that your personal finances are your decision, and I didn't want to rain on your parade. Having your home paid off in 7 more years is wonderful, and I very much sympathize with your desire to feel financially secure enough to stay home.

That said, I do not think that investing vs mortgage is the right question. True, it is likely that with such low interest rates, the market will preform yield a much higher rate of return over the next 7 years, but this is not an all or nothing decision!

Also, I know the power of tangible goals. Knowing that you are working toward paying off your house so that you can retire is a great motivator, and there is no doubt this will help you to increase your rate of savings. Why not create an investment account with the sole purpose of using the money to pay off your house? Every time you put money into the account you can feel secure that it wil go toward paying off your mortgage at some future date. You said yourself that Parker's fidelity account far outperformed the old money market account interest rates.

Anyway, thanks for posting. It may be a little while longer before I can book tickets to come visit. Cam is getting offers from all over, and we extended the deadline until the 28th. The weekend you suggested sounds good though. :)

teresa-bug said...

Rock Chalk Jayhawk! I bet your wedding by Potter's Lake was beautiful. Thanks for stopping by!

Lora Holmes said...

What I love about your insight is that you disregarded the math for a while. While it’s true that this issue revolves around numbers, I think your decisions should be also influenced with what you feel. The numbers are close to nothing if they don’t give you peace of mind, which is the essence behind paying off your mortgage. Good luck, Silvy. I wish you all the best!