Transcript:
Easan Arulanantham:
Should I be paying down debts? Or should I be investing to you know, have some extra cash flow? Should I be investing that into the market?
Tom Vaughan:
Yeah, that’s a great question kind of the opposite of what we just said, right? So, hey, my mortgage is at 3%. Just make up a number, the markets making 10, I’ve got this extra money, should I just pay down the debt at 3%? Or should I put that money in the market that’s been averaging 10? Right. There’s a couple issues there. There’s actually a whole bunch of issues. Number one is the timeline that you’re dealing with. So for me, I want to retire at 75. Right, I’m 57, I am paying my mortgage so that I can get rid of it by age 75. That’s my goal. I’m big believer in not having, you know, dead in retirement. I’ve just seen how well that works for my clients. So I have a set payment, even though I can invest that in the market the extra money, and I and I’m an investor, it’s what I do. So hopefully, I get a good return over a long period of time, I still pay that money into my mortgage, because that’s my goal, I want to pay that off. So that could be something you know that that happens. And generally speaking, I would make that a goal for everybody.
But let’s say you’re 30, right, and you’ve got a 30 year mortgage, just keep paying their normal payment, you’re going to be done before retirement anyway, unless you’re going to retire early. So that kind of works, you can put the rest of the money into your 401k or into the market, I would say if you’re if you have a 401k, and you haven’t put in enough to get the full match, that beats the mortgage, right? Because the match is 100% guaranteed return on your money, you’ve got to do the match. And we’ve said that many, many times. Hopefully everybody kind of knows that. And it is amazing that I guess nationally understand not everybody does that. So it’s worth saying again, you know, but generally speaking, I would probably split the difference if I had some extra money, but some of the market pay some off in the mortgage, you know, but again, it just kind of depends on every situation where I get asked that question has a unique scenario. And you can kind of figure it out based on that scenario. But, you know, I think it makes some sense. If you’re in retirement, and you really want to get rid of the debt, you got $150,000 left, you know, is paid down and tried to get rid of it. There’s some there’s some benefits to that, too. So, you know, it’s interesting, it’s good question altogether.
Easan Arulanantham:
Yeah, so like, if, if a young person’s has a loan, like they’ll pay it off, or by retirement, mostly a lot of the times, but the idea of paying down debt before retirement is that you want to give yourself that extra cushion in your life, like not having to pay, say, your loan mortgages $1,500 a month, not having to pay that is such a, like uplift in retirement, because now like, I have this extra cash flow that I don’t need to pay down. It just gives you a lot more flexibility.
Tom Vaughan:
Yeah, I guess there’s one other way to look at this. That’s important. So my mortgage is 3%, the market makes 10. So theoretically, I should put the money in the market. But I’d still use my goals as possible override. But what if your debt is higher? So what if it’s credit card debt, and you’re at 18% interest and the markets making 10? I’d be putting everything. So if you’re talking Debt Debt, not just mortgage debt, right. And there are people out there, right, some of those student loans, maybe are paying higher rates and those types of things, once they start paying, you know, so I would look at that too. As far as you know, the rate of return that I might get out of the market. Again, I use 10, because it’s a good average, you know, but it’s a long term average. So it may not work out every time. But if I’m having to pay 18 on a credit card debt, I might be paying that credit card debt down and not putting that excess money into the market, right.
So there is an aspect of that of what you’re having to pay. That’s maybe an overriding aspect, to to, you know, investing, generally speaking, investing works really well. So you want to put as much as you can towards the market long term. But again, you still got to take care of yourself and get rid of those high cost debts, and then maybe get rid of all debt by retirement if possible. If you’re already in retirement, maybe funneling some of that money that you might be putting back into the market towards retirement towards paying off your mortgage, you’re getting Required Minimum Distributions, you don’t need some of it, maybe put some of that towards your mortgage. You know, those types of things. So you know, that that would be very nice to do during retirement or before if possible.