Investment Strategy

I am sure many questions will be forthcoming. The ones to which I would like to see answers right away are:

What is the interest rate on your mortgage? If it is 4% or more, I would seriously consider putting the $20k towards your mortgage. I think CD etc. interest rates will be low for awhile, meaning your mortgage may be your best bang for the buck.

Do you have an emergency fund?

Have you figured how your kids' college educations will be paid for? Or will they earn their way through?

I think that the PowerShares ETF PXE, which is made up of oil companies, should give you the best combination of safety and return.

-- Ron

Many writers over decades have stressed that investment is a long-term endeavor. E.g. What do you do with the next 20k? The idea most favor is a coherent plan that is practical and realistic.

One suggestion is to work out a spreadsheet that clearly shows your current expenses, and your planned expenses over the next 10 years. College is a big expense, so are cars, so get accurate numbers and find ways to control costs. There are a lot of moving parts, so specify your budget numbers and stick to them. I'll hazard a wild guess that most people become financially unhappy most often by spending too much. The converse of that is, savings are the basis for investment.

Then you work out a plan. The idea is to get all the moving parts working together. Retirement planning, life-style, from a sound base of knowing how much you have, how much you earn, and how much you need. (Avoid greed when considering how much you want.) Stocks are an excellent asset class - use an estimated 6-7% return on invested funds for your retirement planning.

CNBC had an interview today with a rep from some company that bought a commercial office building for some 44m and just sold it for 110m. That sounds very splashy and very quick money, but the overall size of the company wasn't included, nor was data on its inception, the "deals" that fell through or were 2% gains, and the consistent business plan and execution, the payroll, office conditions, files, research, funding, etc.. All that was mentioned were broad parameters on the commercial market and the very splashy deal they pulled off.

A plowed field looks nice The trees, the rocks, The hard sweat Are not visible.

Thanks Elle,

To answer some question mortgage interest rate is 4.25%, I am paying extra $200 every month.

I participate in ESPP and usually have $20k available for withdraw. I entroll in College fund and it is growing, but rather slowly, I am also enrol in DRIP in 4 blue chip companies, putting $100 each every month.

Some suggested to buy gold...

Abid

For what purposes - armageddon protection, inflation protection, or high returns? Maybe suitable for the first scenario of a flight to quality, although not a very diversified choice in any case. And for inflation, gold would be competing against not only rising bond prices but commodity alternatives. For the last, gold returns haven't been terribly high recently since it's last pop and if it chooses to fall back in price it can happen quickly.

The usual solution for what's left over in your budget for actual investment is a balanced fund of indexed stocks and bonds. But now bonds are a bit precarious due to the expectation of higher interest rates, which devalue old ones with lower rates. Hmm, I wonder if a combo of SPY and TBT inverse bonds would help (unfortunately TBT is leveraged in a risky way)?

As for the tepid recent return on gold, check out

gold is relatively flat and SP500 is fairly modest, compared tozooming palladium, nickle, uranium, and finally I threw in coffee...everything more useful than gold is going up at much higher(unsustainable, bubble burstable) rate. But you can click on differenttime periods for other perspectives.

4.25% is a very low interest rate with new mortgages running about 5%. Don't pay it off early.

You may need to diversify, so if you have no oil stocks, having 20% in PXE, would move you to a more balanced portfolio.

-- Ron

If you think you have enough for an emergency fund, then I would strongly consider putting the $20k towards the mortgage. This is a guaranteed automatic 4.25% return, assuming the deductible interest on your Schedule A is small to none. The interest you pay on your mortgage is money thrown away at this point in time. Once you get your mortgage paid off, you will have even more cash flow, potentially available to pay for the kids' college educations.

I personally would not be willing to bet that gold will return 4.25% per year. It might, but I prefer to be able to sleep at night and not worry that it will or will not.

This is like buying a 4.25% tax free CD. Not bad in this market. I'd guess you are right that he's not in itemized deduction land.

Ron, where a person has a choice, I typically ask them to accelerate or pay off debts. I really don't give a hoot what the rate is or the reason for the purchase, as my objective is to get them back to living within their means and saving regularly.

Was there something in this person's situation that caused you to suggest continued debt, or is that just a general preference on your part?

Ron, where a person has a choice, I typically ask them to accelerate or pay off debts. I really don't give a hoot what the rate is or the reason for the purchase, as my objective is to get them back to living within their means and saving regularly.

Was there something in this person's situation that caused you to suggest continued debt, or is that just a general preference on your part?

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Does 4.25% interest matter if he's in the 16th year of a 20 year amort? At that point he's paying mostly principal, plus he's admitted to paying additional principal.

Now if he's into year 4 of a 20 year amort and prolly paying mostly interest on his mortgage payment, then I say it's a no-brainer: put the $ 20K on the mortgage.

Oddly enough, my view is the opposite. With 4 years left to go, he likely hasn't enough interest to be itemizing, and the cost of the 4.25% rate is unchanged after taxes. So "investing" by prepaying is a 4.25% return.

Yet, when prepaying the longer term mortgage, I dig deeper. 4.25% costs me 3.06% after taxes. Do I expect the alternative investments to exceed that? DVY (the higher dividend DOW stock ETF) was recently yielding

3.5%. So, in a Roth, over 15 years, do I believe this ETF will actually be down?

Because OP talked about the shorter term, paying off the mortgage buys him back the cash flow as it's close to being paid off. So my answer to him is to pay it off.

Joe

Oddly enough, my view is the opposite. With 4 years left to go, he likely hasn't enough interest to be itemizing, and the cost of the 4.25% rate is unchanged after taxes. So "investing" by prepaying is a 4.25% return.

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What do taxes have to do with a mortgage unless it's an income generating property?

Or is this another one of those American investing rules that only apply there? If that's the case then I don't know. They have weird tax rules in the US.

Sorry. I hit delete instead of spell check for this blurb. Apologies for sending it in two posts.

I forgot to add that there are tax implications by NOT investing in a retirement savings shelter. Rushing to pay off a low interest loan instead of adequately contributing to tax shelters can cost you in the long run. You can sometimes earn 10 or more percent by maximized contributions to retirement plans or tax sheltered savings ( equity returns PLUS tax refunds).

here is a case example from my own family. We are in Canada. My wife pays

38% income tax, I pay 31%. Both of us contribute to separate RRSP accounts, which are tax shelter retirement investment schemes. We currently pay a $1500 a month mortgage, which is 2.9% interest, variable. Currently about $950 of the mortgage is applied to principal and the remaining $550 is interest. If the rate goes up or down, and it can at any time, interest is more or less. We are in year 2 of a 25 year amortization.

my wife pays $10 000 a year mandatory contributions to her pension plan which gets about $3800 tax refund and contributes $5000 to RRSp which gets $1900. Her total refund will be $ 5700. I will receive a $1400 refund for $5000 in contributions to my RRSP. So our total tax refund will be $7100. of that $7100 refund, $3300 is from the voluntary contributions of $10 000.

Do you follow the math or am I too confusing?

My wife's retirement investments averages about 6.5 % return a year. My investments average about 7.5% a year. We are in our early 30's.

Now we happen to spend our tax refund on home improvements, paying down car loans,a nd paying down my wife's university debts. But really smart people could put that tax refund on their mortgage principal one figures

If we had applied the voluntary contributions to our retirement investments to our mortgage principal as a lump sump instead( lump sum being $10 000), how could we benefit. That $10 000 is not $20 000 like the OP's is but it's in the same realm.

Keep in mind that we are not in the United States where I guess they get some sort of tax break for paying their mortgage interest.

You are right. Unlike in Canada, the interest paid on a mortgage on one's personal residence is deductible in the USA. However, in Canada if you have no mortgage on your personal residence and put a mortgage on it for the purpose of investing in rental property, the interest then is deductible.

Setting income tax considerations aside, no it doesn't. He is paying

4.25 APR interest on whatever balance is owed, regardless of what year of the amortization he's in.

Factoring in income tax, I agree with the general principles of joetaxpayer's view: All other things being equal, a mortgage with fewer years left on it is more likely to be a better candidate for prepayment.

I also favor the peace of mind of home ownership and all the choices that will present when the OP has paid off the mortgage and, as Joe suggested, his cash flow shoots up.

When you say you don't need any of the $20k soon, does that mean you won't be contributing more than that $200k/mo saved towards the kids' college costs, or that you don't consider 5 years "soon"?

Is 10% towards retirement enough? It often isn't, but perhaps you've saved aggressively so far or have a retirement lifestyle that's below what your current income suggests.

Is this $20k the only $20k sitting in cash? In this day and age many people should keep $10k+ in cash/similar at all times just to deal with the float on bills, home repairs, car stuff, vacations, etc.

-Tad

Thanks all for great comments and suggessions, I do have abetter understanding now, I will probably payoff some of the mortgage and keep some in cash.

When I had an 8.75% mortgage, I tried to pay it off as soon as possible.

But, the S&P 500 should have a return of 7 to 8%, making it a better investment than 4.25% paying off the mortgage.

If a person is extremely risk adverse, than paying off the mortgage is a better deal than buying treasury bonds.

My preference is to maximize net return on investment subtracting the risk.

-- Ron

Setting income tax considerations aside, no it doesn't. He is paying

4.25 APR interest on whatever balance is owed, regardless of what year of the amortization he's in.

Factoring in income tax, I agree with the general principles of joetaxpayer's view: All other things being equal, a mortgage with fewer years left on it is more likely to be a better candidate for prepayment.

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I understand the group is for Americans but I didn't realize they had tax implications in mortgages there too. I shouldn't have offered advice. My apologies to Abid.