Comments on: June – August 2005 Monthly Review

By: John

John — Thu, 22 Sep 2005 00:58:21 +0000

Jarred wrote “…If you can invest better than 7% (an estimate of your current interest rate less tax savings) then you are using your dollars more wisely.”

In today’s market, this is a pipedream. If you can consistently do this, quit your job because you belong in the hall of fame. Even if you can meet this amount you’re just breaking even.

By: John

John — Wed, 21 Sep 2005 23:52:53 +0000

I like to chime in on this conversation on paying off your mortgage. I have been a saver all my life. So much of saver that I was always in the position of buying a house for cash instead of taking a mortgage even at the most expensive housing area in the country. Yet, when I brought my house many years I took the a the biggest mortgage I could so that I could invest in other areas. As interest rates drop, I decided to refinance my 9% mortgage. A no-brainer. As everyone knows interest drop further. I paid off my mortgage. Savings rates drop to .25%. The stock indexes haven’t paid off in 5 years. Blah, blah, blah. A mortgage was a watse of time in my circumstance. I had paid thousands in cost to get them. What I learned is that most people don’t get the full deduction of a mortgage, or people don’t get any deduction of a mortgage until they exceed the zero tax backet. Basically a mortgage is for people [who] can’t afford the house outright, or investors leveraging an investment for more gain.

(Bolded text modified at John’s request)

By: jim

jim — Wed, 21 Sep 2005 20:51:12 +0000

I wish I was considered “highly compensated.”

My contribution rate is currently now the minimum amount necessary to get the maximum matching money from my employer. John, in later posts, makes good points about the risks of 401(k)s and IRAs.

By: Shirl

Shirl — Wed, 21 Sep 2005 20:25:26 +0000

Hi Jim,

I came to read your blog via the NYTimes link. Thanks for sharing a very personal part ofyour life with us.

Jared’s comment about why pay off your second mtg when you can invest hits close to home as I’m in the same situation as you are (as well as many others as well). For me it’s definitely about having this extra debt on my shoulders as well as the guaranteed return of mtg interest rate. Doing this brings more piece of mind than investing the extra dollars. Sometimes it’s what alleviates the stress/worry that makes it all worthwhile.

Lucky for you on the 20% contrib. rate to your 401k. I’m only allowed up to 12% ( due to the high compensation rule). I snicker at that, as I do not consider myself ‘Highly compensated’.

By: jim

jim — Tue, 20 Sep 2005 03:33:00 +0000

My Roth is maxxed out whereas my 401(k) isn’t.

As for deciding to “invest” in my mortgage instead of something else, I think of it like this. I can pay down my mortgage and essentially save myself the 7%+ interest which was tax deductible or I can invest and hope that I achieve the historic 11% return of the S&P. Granted, the numbers aren’t entirely correct but I’d rather pay down the 7% guaranteed instead of attempting to achieve the 11%, on which I’d pay a tax on. I’m in the 25% tax bracket so on the 11% return, a quarter of it will get chopped away, or approximately 3.6% – which yields a net return of 7.4% which is less than my interest rate.

If you’ll pardon the ugly and imprecise math, you’ll see the decision isn’t as clear as you may think. Plus, add the unquantifiable joys of being closer to owning your home and the decision is relatively simple for me.

By: Jarred

Jarred — Tue, 20 Sep 2005 02:36:24 +0000

Last comment as I have read on. Are you maxing out your Roth IRA? If your income limit allows you to invest in a Roth you should divert a portion of your 401K to the 4K in a Roth every year. When you retire and if you retire your tax bracket will probably be higher than it is when you are 24. Add to the fact that unless Jenna or Barbara marry and reproduce well, we will not have a Bush in office and therefore will probably have higher taxes when you are forced to withdraw from your 401K. Just a theory, however I would recommend maxing out your Roth rather than going all to your 401K.

By: Jarred

Jarred — Tue, 20 Sep 2005 02:17:48 +0000

I am a new reader, thanks to the NYT article and am very interested and impressed with your diligence and budgeting. I am a 24 year old tax CPA and find personal finance intriguing.

Why pay off your 2nd mortgage so quickly? The interest paid is tax deductible and therefore your rate would be lower than you originally state. If you can invest better than 7% (an estimate of your current interest rate less tax savings) then you are using your dollars more wisely.

This is backwards from Dave Ramsey’s advice of paying off your mortgage before investing even in your 401K, but I wondered what your thoughts were.

Thanks
Jarred

By: jim

jim — Sun, 18 Sep 2005 23:16:32 +0000

Yeah I have a little under $25k in student loans and I have a 30 yr mortgage… and I hope to pay it off way before that.

By: Aditya

Aditya — Sun, 18 Sep 2005 23:03:55 +0000

Do you have and ARm or an 30 yr Mortgage. I am assuming what ever r mortgage you have you are planning to pay waybefore that.
DO you have student Loans sorry if you have mentioned that before.

By: jim

jim — Sun, 18 Sep 2005 07:12:58 +0000

I don’t budget for either taxes or inflation, I don’t see why I would need to. As for property taxes, I don’t know how much I will pay in property taxes over the life of the loan/ownership but it’s pretty sizeable right now. It’s all based on assessed property values and a tax rate of about 1% in the county I live in.

I think 3% inflation is always a useful “rule of thumb” when talking about loss of purchasing power so I believe a loss of 3% a year seems fair. (of course who knows what will happen)

By: Dan Hopkins

Dan Hopkins — Sun, 18 Sep 2005 07:05:59 +0000

……taxes & inflation are hard to “budget” for

How do you budget for tax & inflation ‘expenses’ ?

How much in ‘property-taxes’ do you estimate you will pay for your home … over the course of your mortgage ?

How much dollar purchasing power do you estimate you will lose over the next 10-20 years, due to inflation of the U.S. dollar ?