Staying Put

Work is going well? Fantastic! Perhaps you received a raise, or you are newly promoted. Maybe you paid off your student loans or credit card. For whatever reason you find yourself with a sudden, persistent source of extra cash.

Congratulations! You have options… But what are you going to do?

As I am writing, interest rates in the United States have risen off their historic lows in 2021, but mortgage rates are still very reasonable by long-term standards. Home prices have jumped higher in the past year, yet many of us are still considering the tempting allure of a newer home. The fear of missing out is real and it can needlessly obligate us to a life with less options if we are not careful. This article seeks to propose alternative uses for your newfound extra cash. This article is about staying put.

A mortgage is obligatory. It is non-discretionary. IT – MUST – BE – PAID. What I would like to suggest is a series of discretionary expenses that could yield as many benefits as a monthly payment you are legally obliged to make for up to 30 years.

Pay Down That Debt!

If you are still carrying high-interest credit card debt then it is time to stop. Before reading any further, assess your credit card debts and make a plan to pay them off if you have not done so.

No credit cards? Congratulations again!. You may proceed.

How would you like to retire?

How are your retirement accounts? Are you deferring salary into a qualified retirement plan? If so, are you maximizing that deferral? Do you know what the maximum deferral is? Well, it varies by age, but if you are under 50 you can currently set aside $20,500 each year. That’s nearly $790.00 per pay period if you’re compensated bi-weekly.

If you are over 50, you can make additional “catch-up” contributions of $6,500 annually. That’s another $250.00 from your bi-weekly paycheck if you are keeping track. Coupled with the initial $790.00, you are now at a $1,040 per pay period – deferred and invested for your future. Now double this if you are married and your spouse enjoys a similar retirement plan.

This is not a paltry sum and having a serious plan for setting the funds aside is important before you turn 50. It makes sense to have the funds available, on a discretionary basis, prior to needing them. This way, the increased expense has a smaller chance of negatively affecting your lifestyle.

How much are you setting aside? Will it cover what your expected need? Your financial planner can help you work through questions and arrive at a number that suits your individual situation. (Spoiler alert! More is better.) You can also use an online retirement calculator to begin this process on your own.

What does your second pile look like?

You may be saying, “Second pile of what? What is this nerd talking about? “

I am talking about your second pile of money – your “after-tax” pile.

Your first pile is your retirement savings. This is where you slowly stockpile reserves, year after year, so you can live comfortably when you no longer wish to work. This pile is great because you get to build it without paying income taxes up front. The problem comes after retirement when every dollar you spend will be taxed as income by the federal government. The state you live in may have its hand out too. [1]

Your second pile is “after tax” investments that you build up after paying taxes on the income you earn from working. A Roth IRA allows you to defer up to $6,000 annually (with a $1,000, after 50 catch up available). Roth’s are great because there are no taxes if the account has been opened five years. You can even pass them on to your kids, and they probably will not pay taxes either.

A serious second pile also includes your taxable brokerage account. Invest here when you have comfortably taken advantage of a qualified retirement account and your Roth. The gains will generally be taxed, but you owe nothing on distributions and the assets can be quickly converted to cash if the need arises.

The larger your second pile is, the more control you have over your first pile in retirement. Say you want to take a big trip or remodel your bathroom. Do you want to get pushed into a higher tax bracket just to make that happen? Should that trip cost you 20% more just because your money happens to come from a pre-tax retirement account?

The answer is yes . . . IF you do not have any other assets to spend from your second pile.

Want to enjoy the fruits of your labor now?

So far, we have been talking about putting your ducks in a row, but it is often more fun to count them. How do we enjoy our progress without letting it set us back?

One way is paying for personal services. Ask yourself the following questions and see if your answers match mine.

Do you like mowing the lawn? – Of course not.

You wanna run this vacuum? – Eww! Gross.

How about dusting your living room? – Hard pass.

Wait, one more. You like shoveling snow? – I’m leaving.

You can pay a good person a modest amount of money to handle some of these tasks for you. It can be a great way to invest in yourself, while supporting local businesses.

Is it an investment? Certainly, because you can use the time saved to forward your career or your personal interests, either of which has the very real chance to improve your quality of life.

Now you may be saying, “Wait, I have kids! Shouldn’t they help?”

Of course. Everything I wrote above still applies. Pay them less than the pros, pocket the difference, and constantly remind them how lucky they are to have a parent teaching them responsibility. Kids love that.

There is an added benefit that the person you are paying is probably better at it than you are. This may not matter much for the lawn or dusting, but I recently hired a teacher to tutor my son in math. It was a great experience because he received help from a professional who was ready to deal with him on every level he required. It simply would not have been as successful if I had tried to do it myself.

What’s your exit strategy?

A good job can become bad in very little time. Family gets sick. Kids move away. People change. Nobody is entitled to a convenient life.

If you wake up one day and find you hate your job or your neighbor, what are you going to do about it? Put another way, what do you want to be prepared to do about it?

We all want to leave or change situations that become intolerable. There is freedom and stability in modest expectations. By keeping your expenses down, you can make the decision to earn less if you feel it is best for you or your family. That decision is far easier when obligatory expenses are as low as possible.

If your spouse gets sick, you can choose to stop deferring money into a 401k for a time to catch up on the medical bills. You do not have to contribute to a Roth. It may be optimal, but never required. The tutor can be dismissed if the funds are not available. The point is that your expenses are still choices you make every time you pay them. That choice is not truly present when paying for an expensive home. The bank will not easily forgive your mortgage, and they actually pay very large companies to ensure that nobody forgets. [2]

Modest Living & Generous Giving

“We can’t help everyone, but… everyone can help someone.”

– Dr. Loretta Scott

It would be unconscionable to end a discussion of discretionary wealth without mentioning charitable giving. The pandemic has been devastating for families in the Unites States and across the globe. No one is entitled to a convenient life. Since charitable giving is intensely personal and ultimately discretionary, I will not issue a mandate, but rather a reminder:

Suffering is real. You can help if you are inclined.

Here are a few of our favorite charities at Burns Matteson Capital Management:

Conclusion

An expensive mortgage payment can rob you of powerful options to self-determine. Life should never be free from care or obligation. However, guarding the choice over your commitments can breed a deeper satisfaction with the life you choose. Forgoing a large mortgage is a remarkably efficient way to preserve your options for years, if not decades, with one apt decision.

[1] 9 States With No Income Tax (investopedia.com) – A nice, short discussion on some of the pros and cons of living in a state without income taxes.

[2] The 3 Major Credit Reporting Agencies and What They Do (thebalance.com) – Big data companies that keep tabs on you for money.

About the author

Christopher Davis, CFP® is a CERTIFIED FINANCIAL PLANNER professional at Burns Matteson Capital Management, a Financial Planning and Investment Advisory Firm with clients throughout the United States. www.BurnsMatteson.com