Monday, May 29, 2017

Never pay off your Mortgage - The second $100,000 is the hardest!

Hello Everyone,

As the saying goes, hindsight is 20/20.

This is a post directed to myself years from now when I buy another home or rental property.  Never pay off the mortgage!

It was around this point, one year ago when my wife and I made the conscious decision to pay off our primary mortgage on our home.  I eventually ended up selling most - $100,000 of our stocks around the September 2016 time frame.  I sold another $20,000 around December and then another few chunks around the January time frame.  Looking back at this post: http://americandividenddream.blogspot.com/2017/03/im-still-here.html
and also this post:  http://americandividenddream.blogspot.com/2016/10/financiallife-update.html
you can see most of the information there.

From September when we took out roughly $100,000 to today, the S&P has rallied 13%.  Imagine that... a straight line up!





At first, it looked as though I might have made a great decision as Trump won the election and the DOW was down 1000 points.  Then a major reversal occurred and its been up, up and away ever since.

Another down fall of paying off 100K of mortgage in October was that I missed out on another 3 months of interest deductions on our taxes.  The past few years we were right around breakeven on taxes but removing another $1200 of deductions over the last 3 months caused us to owe more money than usual.  Had I thought that through and waited to sell out of the market in December that $1200 could have still been deducted plus, perhaps I would have stayed in the market considering it rallied hard in November and December.

This takes me to my next point that the second $100K is the hardest. From July 2013 to December 2015, our portfolio increased from $35K to $105K.  70K in 1.5 years.
 

Then,  from December 2015 to April 2016, We increased another 70K, including a market dip:


Then, the compounding started to take effect and we saw the portfolio of 401K and taxable take off from April 2016 to that fateful day of selling stock in September 2016.  Our portfolio (with a $17K infusion) gained $50K in 5 months (or 33K investment gains). 


 Since that fateful day, the market has returned 13%.  If we were to take 13% of 225K, we would arrive at $254,000, not including additional investments (which would have occurred instead of putting money towards mortgage like we did).  Instead, our portfolio of investments now looks like this:



We have gained a meager $20K and that includes investing into the 401K.  We would have made more in investment gains - WITH NO ADDITIONAL INVESTMENTS  --  then we have with adding a few thousand plus investment gains.

COMPOUNDING RETURNS ARE A REAL AND POWERFUL THING!!  HARNESS THEM!!

Remember this line when you go to pay off a big debt.  As long as that debt is not Credit Cards or other harmful debt, it can be used to further increase net worth much faster than otherwise possible.  I have realized that now and it has been a painful lesson.

My wife and I would most likely have a portfolio up around $300K had we not paid off debt.  So, from the September month to today, our portfolio would have been up another 75K or more.  In the beginning, it took us almost 2 years to increase $100,000.

It would have taken a little less than 1 year for us to go from $200,000 to $300,000.  I can only imagine (if the bull market continues) how quickly we could go from 300K to 400K and beyond!!

Now don't get me wrong, not having that extra bill every month is pretty great.  Sleeping at night has never been easier.  I can sit on my front porch say hi to the neighbors and know that what they are looking at is all mine.   No one else owns this property but me.  However, I think we should have went about things differently.

1.  If you are going to pay off your mortgage, pay it off at the end of the year or within first couple months of the next year to harness the tax breaks.
2.  Dont sell in a bull market hahaha  --  Harder said then done.
3.  Pay off mortgage when your investment balance afterwards puts you very close or at retirement!  -- This is key.  And this is something that Mr. Money Mustache and a lot of retirees do now.  This makes it feel like you are not taking a step backwards - PUSHING TOWARDS 100K of savings again - like we are.  But instead, taking a step forward into FREEDOM!  Or at least close to it.
4.  Realize that your dividend income will take a pronounced step down.  See step 3.  I get depressed sometimes when the dividends on the big months of the year aren't approaching that $1000 like they would have been.
5.  Dont live in the future - Stay grounded and be appreciative that what you have just done is a big accomplishment.




9 comments:

  1. Intrestinf post. You could always refinance... obviously that would be hard now that you have no debt. I used to be all about paying off the mortgage but am currently in the process of refinancing to use the equity for passive income investing.
    Great story thanks for the info!

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    1. yea, refinancing might have been the way to go. I could have put more towards the mortgage at that time (Say $25,000) which would have felt like paying it off but I'd stay more liquid and I'd have a much lower monthly payment to invest more.

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  2. Focus on the positives and not the negatives, when the market pulls back you are in a great position with the extra capital now that you do not have a mortgage payment. A better approach might have been not to cash out of the market, but rather stop investing in the market and divert the funds towards paying off the mortgage. This is the approach I've been taking since early 2016, because it is silly to buy anything in this overpriced market today.

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    1. My friend,
      Paying off your mortgage is never a "bad" decision. You still got the return (mortgage interest saved). It was risk free and guaranteed. You are Free!!! Whatever happens to this market is irrelevant to you. You are in a solid position and you make a solid decision. Good for you!

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    2. Yes, Anonymous, I agree with you. Putting more towards mortgage or possibly refinancing (see above) should have been the way to go.

      I agree with both comments that I should definitely focus on the positive. Currently it is very hard to do that though!! haha.

      Another killing to the psyche was that my company's 401K plan has new funds that we have to purchase that don't pay out nearly the amount of dividends as before. So the big $1000 month in December was more like $200 this past year.

      Thanks for commenting!

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  3. I think I wrote you on that first post saying how much it pains me to see you pay off your mortgage! :D

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  4. ADD,

    I understand that wiping out that mortgage means you traded off some dividend income, but that is still awesome. That feeling of "I owe you nothing." Recently knocked out my wife's student loans, it felt great and it doesn't even have a piece of furniture come with it. That said I understand the missing income. Right now we are looking to buy a home, and man I wish I could go and buy the whole thing with cash...

    - Dividend Gremlin

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    1. If paying cash for something doesnt hurt your dividend income, I am all for it. I was okay paying for cash with our cars, student loans, etc. Because we just hit up the emergency funds to do it. The dividend stocks were never harmed if you will.

      Good luck buying a home! It is awesome and fun and you will second guess yourself but its all worth it... if you like the area and see yourself there for many years.

      Cheers!

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