Week 27: Save More, Tactic 7

What can you do this week?

• If you’re on the fence about what to do with your free cash, consider the factors mentioned below.

• A 6+% mortgage interest rate can be a tipping point where debt payoff may be better for you. There is no way to be certain.

• A comprehensive plan will help you make an optimal decision vs. deciding in isolation.

What Do You Have To Clear?

• While not the only concern, your mortgage rate is a significant factor.

• Personally, the cost of mortgage borrowing is similar to a hurdle rate companies use to evaluate the potential ROI on a project.

• You can apply this thought process to your free cash.

• Paying down your mortgage will increase your net worth and is known.

• Investing in capital markets is an unknown and the potential return is greater.

  

• Other factors to consider are less clear cut and highly individual.

  

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How Do The Investment Options Look?

• One place we can look to help our decision is what the big investment firms expect. Vanguard’s 10 year outlook from last year is quoted below.

• “we have downgraded our U.S. equity return expectations to an annualized 4.2%–6.2% over the next 10 years from 4.4%–6.4%…We project 10-year annualized returns of 7.0%–9.0% for non-U.S. developed markets and 6.6%–8.6% for emerging markets. We now expect U.S. bonds to return a nominal annualized 4.8%–5.8% over the next decade…for international bonds, we expect annualized returns of 4.7%–5.7%.”

• These have no predictive ability and are going to be “wrong” by some amount but the take away should be equity markets are more likely to not repeat what happened the last 10 years in the next 10 years.

  

Many Financial Decisions Aren’t Clear Cut

• The peace of mind found in no longer having to pay a mortgage each month can sometimes outweigh the financial benefit of investing free cash instead.

• A mortgage payoff calculator is another powerful tool to explore, in alignment with your financial plan.

  

A Plan Is The Equalizer

• If you’re still hanging on to a minimum amount of emergency cash, far behind in retirement savings, and have other forms of high interest debt, this debate is not really relevant. This is where a financial planner can really help.

• What’s most important to you? The highest and best use of your money is only going to be determined when you use your money according to your values to reach your specific goals.

• Making this decision in isolation outside of a comprehensive plan will lead to a less optimal outcome.

  

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