Looking back, I’m certain that I made a money mistake when I chose to pay off my mortgage instead of focusing on investing.
At the time, I was in my 30s and my mortgage was less than $100,000. I had bought my first home when I was 28 years old. I had a 25-year amortization and my bi-weekly payments were $750, if memory serves. That amount was probably $450 more than I was required to pay since I had routinely increased my mortgage payment by the maximum allowable percentage each year. I was able to handle the costs of running my home, and my budget fortuitously still contained a significant bit of disposable income.
Hindsight is 20/20
I wish I had known then what I know now. Had I become wiser sooner, I would have invested that extra $450 bi-weekly into the stock market. Hindsight is always 20/20, right?
So how do I explain my choice? A good deal of my reasoning at the time was founded on fear. I’m a Singleton. That means I don’t have a second income coming into my household. I knew that if something were to go catastrophically wrong, then I would lose my home. My family’s not wealthy. They would have done what they could, but I would have most likely lost my home eventually. Having a paid-off home seemed to be the smartest move for me.
I was also a huge fan of Dave Ramsey’s book – The Total Money Makeover. I read that book diligently and wholeheartedly subscribed to his teachings of becoming debt-free as soon as possible. After adopting his teaching, I put it into practice and attacked my mortgage with a vengeance.
With the benefit of time, I’m wondering if I didn’t make another money mistake. My goal had been to retire at age 50, not a particularly young age in the world of F.I.R.E. but certainly younger than the traditional age of 65. I’ve crunched the numbers and I won’t be able to hit my target without a large lottery win, or without developing a taste for cat food. I don’t want to retire simply to stay in my house due to financial constraints.
What could have been
If I’d known then what I know now, I would have stuck to my minimum required mortgage payments. Doing so would have allowed me to invest all that extra money into the stock market. Obviously, I would have taken part in the roller-coaster ride of the 2001 crash. And I would have gone through the other one that we had in 2008. Yet, I would have been be sitting quite pretty by now. My investment portfolio would be much fatter even though I would still have my mortgage.
I should not fault myself for not knowing everything about money in my thirties. Blogs were just beginning to take off. Unlike today, the Internet wasn’t a ready source of debates about the benefits of paying off a mortgage versus investing for the future. I picked a path, believing that I could do just as well if I started investing in my mid-30s. I wanted the security of a mortgage-free home before directing my funds towards my investment portfolio. It seems kind of weird to write that down. Today, I realize that if I had invested first, my portfolio would be throwing off enough income to pay my mortgage.
Take it for what it’s worth
What worked for me won’t necessarily work for you.
Today, 5-year mortgage rates are less than 3.5%. When I took out my first mortgage, I was overjoyed to have a 5-year rate of 6.5%. Today, my first condo would sell for approximately $240,000. I’m the first to admit that my condo wasn’t anything special even though I fell in love with it on sight. (That’s another money mistake that I made!) When I bought that condo, I paid $74,000.
My advice to other Singletons with a mortgage is to crunch your own numbers very carefully.
Like I’ve written elsewhere on this blog, you’re the one who is responsible for your income security in old age. You’ll need a place to live and your goal should be mortgage freedom before retirement. At the same time, you need to invest your money for growth so that you have a nice, fat investment portfolio to get you through the thirsty underwear years.
Even though I now believe that everyone should be investing for long-term growth while paying off their mortgage, you know the particulars of your circumstances better than I do. As such, you are the person best situated to make the choice that you think is best.
My money mistake was a doozy, but I’ll still be okay. I’ve got a mortgage-free home and a solid portfolio. I would have had more if I’d known better, but I still have plenty so I can’t complain too loudly. Life presented me with a choice between two sacks of gold. I chose one over the other, but I still wound up with a sack of gold.