A home will probably be the second best investment you’ll ever make (education is first, although marrying someone worth $10 million is even better). True, a home is a ceaseless drain on our hard-earned money, but home ownership still beats renting, despite many opinions to the contrary. Aside from the quality-of-life advantages of owning a home, there are two very significant financial benefits of home ownership (beyond the obvious, but overrated, tax deductions for mortgage interest and property taxes, now curtailed by past tax changes:
- A home gives you the opportunity to be mortgage-free by the time you retire or shortly thereafter. Owning a mortgage-free home can dramatically improve your odds of enjoying a financially comfortable retirement. In fact, paying off your mortgage could be the single most important thing you do to achieve your retirement dreams between now and the time you retire.
- A home is a potential source of additional income during retirement. Retirees who sell or downsize their homes can put up to hundreds of thousands of dollars of gains, most or all of which is federal income tax free, into their retirement kitty.
The financial savings of mortgage prepayment are easy to quantify. For example, making one extra payment a year on a $200,000 mortgage could save you more than $60,000 in interest.
Exceptions to Jonathan’s mortgage prepayment entreaty. In reckless defiance of the criticism that’s been heaped upon me, I still urge you to make extra payments against your mortgage, but if and only if:
- You’ve pretty much maximized any and all available retirement plan contributions, including your retirement savings plans at work and an IRA. While there are lots of financial benefits of reducing your mortgage sooner rather than later, tax-advantaged retirement savings plans offer better ones, so you should generally put as much as possible into retirement plans first.
- You’ve paid off all other higher interest loans, including credit card loans and car loans. It makes no sense to make extra payments against your, say, 4% mortgage while you’ve got an 8% car loan and 18% credit card balances.
- You’ve got a stash of non-retirement savings sufficient to pay at least six mortgage payments. This will protect you in the event you lose your job or some other calamity befalls you. Everyone needs some readily available rainy day money. The fact that you’ve been reducing your mortgage payments doesn’t enhance your standing with the lender; if you fall behind on your payments due to lack of an emergency fund, don’t expect to receive any special treatment.
Smart Money Tips
- Avoid single country or single region international funds. The foreign investment markets appear to have promising prospects. Investors who wisely want to invest some of their money overseas are often attracted to single country (Australia, for example) or single region (Latin America, for example) foreign stock mutual funds or exchange-traded funds (ETFs). Perhaps they’ve read a news report about an economic boom in a particular country or region. Or one of those funds just turned in a spectacular quarterly or annual performance. But we think investors should avoid single country or single region funds. Putting money into a narrow foreign market is too risky for most of us. We’re not very good at identifying the most promising foreign markets, so by the time we get in, it’s probably too late. Instead, let the manager of a good garden-variety international stock mutual fund decide which countries and regions are the best places for your money or simply cast a wide net with an ETF that invests everywhere overseas.
- Help your parents avoid scams. Scam artists victimize so many senior citizens that strong defensive measures are crucial if you’ve got family members who are seniors or if you’re a senior. There are undoubtedly a lot more scams taking place than we think because so many victims (particularly oldsters) are too embarrassed to admit they’ve been taken. The scam artists who prey on the elderly aren’t going to disappear, but younger generation family members can help their loved ones avoid being victimized. Encourage your parents or other older relatives to check with you or one of your siblings before spending money on anything out of the ordinary or anything that’s ordinary but just doesn’t seem right. The Pond family has had success with the “$500 rule,” and it has prevented some problems over the years. It’s very simple: whenever someone asks a parent to pay for something that costs more than $500, the parent checks first with one of the kids. Just saying you have to check with a family member is enough to send many charlatans packing.
Food for Thought
The time to buy is when blood is running in the streets.
–Old Investment Proverb
Money Can Be Funny
Fashion is a form of ugliness so intolerable that we have to alter it every six months.
-Oscar Wilde
Word of the Week
vade mecum
(VAY/VAH-dee MEE/MAY-kuhm) – A book for ready reference, such as a manual or guidebook.
Origin: From Latin vade mecum (go with me), from vadere (to go) + me (me) + cum (with).
Tablets and Smart Phones serve as the modern vade mecum.