If You Were Your Kid…

If you were your kid and you were an American, come of age in a time when America the Great was rapidly turning into a Third-World Country, what would you do differently from what your parents did? From what your kid him- or herself is doing right now?

Do strange little thoughts like that ever cross your mind? They sure as Hell cross mine.

My father planned carefully for his retirement and his old age. Thanks to his planning — and to his lifetime of amazingly hard work —  I haven’t had to put in that much single-minded effort: he left me enough to live on comfortably through my dotage. But that’s not so true of my son.

Although my son’s dad is affluent, like me he also no doubt will live (expensively) into advanced old age. My son’s grandmother just died at the age of 106 (no, that is not a typo), having spent the past 20 years wasting away ruinously in a nursing home. The new wife is a good 20 years younger than me, and though she has a highly competent son, she also has a feckless, dependent daughter who never will be able to care for herself and her offspring. Thus most of whatever my son’s father has now will be dedicated to supporting the less gifted occupants of that side of the family.

My son, the recipient of a spectacularly expensive private education, has a decent job but not one that will make him rich. It can, however, allow him to work remotely from just about anyplace that he chooses.

My mother smoked herself into the grave in late middle age. We have no clue how long she might have lived had she never picked up a cigarette. Her father died of Hodgkin’s disease, an acquired cancer not uncommon in his part of the country: we have no idea how long he might have lived had he dwelt someplace else, never smoked, and never drank. Her mother chippied herself into the grave: we have no idea how long she might have lived had she never been exposed to the kinds of reproductive viruses one acquires during a wildly misspent youth. But the other women on her mother’s side of the family were Christian Scientists who lived into advanced old age: we do know that in the absence of alcohol and tobacco, they lived into their mid-90s even without ever going anywhere near a medical doctor or a patent medicine.

So what we have here, in the planning department, are two people — me and my son — each of whom have a shot at living into advanced old age. Or not.

What can be done for my son — by me or by him — to ensure that he will be financially secure into his dotage?

We know that I absolutely positively do NOT want to spend my last years in a “life-care community,” a rabbit warren in which to lock up old folks. My father consigned himself to one of those places after my mother died, and I have several friends who are now living (expensively) in similar prisons. I will take a swan-dive off the North Rim of the Grand Canyon before I allow that to happen to me…and that also is neither a joke nor a typo. My house is paid for: if I die tomorrow my son will inherit a piece of property worth about $400,000, free & clear. My son’s house will be paid for in another 10 or 15 years; it will be worth around $325,000 to $350,000, if all things remain equal. He lives frugally and invests in IRAs, and so he presumably will have some retirement savings in hand, if he lives into his dotage.

BUT…

The Covid-19 fiasco has shown his employer, clear as handsomely chlorinated swimming pool water, that there is no reason to maintain expensive office space to support a profitable insurance business. He believes the company will never re-open its pricey new digs in Tempe, a dreary suburb of Phoenix. Shortly before the Covid fiasco began, he was promoted to a managerial position. He remains a manager: remotely.

What this means is that there’s really no reason for him to continue living in a dump like Phoenix, a vast, ugly, crass bedroom tract that we might kindly call L.A. East. If the company settles permanently into a mode in which most or all of its mid-level employees can work online, he could in theory live anyplace he pleases.

And there are many, many better places to live.

In Arizona alone, for example, towns such as Prescott, Bisbee, Patagonia, the outskirts of Tucson, and even Payson have far more temperate climates and are nowhere near as grubby and  crime-ridden as Phoenix. Nor is there any reason to stay in a culturally backward hole like Arizona. If you want to live in the Southwest, there are many better places to live in Colorado, Utah, Nevada, and parts of New Mexico. If you don’t mind jumping on a plane to visit your employer for monthly staff meetings, Oregon, Washington State, parts of Mexico, Costa Rica, Panama, and waypoints are highly desirable venues. With a fistful of cash from the sale of two houses, you could easily install yourself in the Low Countries, Ireland, the south of France, Italy, Scandinavia, Switzerland, Canada, New Zealand, or parts of Australia.

Why stay in a declining economy with a corrupt leadership and a moribund health-care system?

Why not use the capacity of electronic telecommuting to ensconce yourself — now, while you still have some years to enjoy life — in a better place?

If I were my son, I would be so gone. Right now: I wouldn’t wait for retirement, certainly not given the wacksh!t direction into which our country’s politics have dragged us. I probably would leave the US, given half a chance to pull it off. But even if I chose to stay in the this country, you can be sure it wouldn’t be in Phoenix.

Speaking of the which: as we scribble a cop helicopter is buzzing its way toward us, the dog has flown into a batsh!t frenzy, and I suppose I’m going to have to get up, dig out a pistol, and lock the security doors. So much for the scheme of taking a moonlight dip in the pool.

Where would you want your kids to spend the best years of their life?

Stress-free Finances: What Do You Want?

What do you want, financially? What should you want? Me, I know what I don’t want: I don’t especially want to be rich. I’m content to live in modest comfort, with no debt obligations to anyone.

Owning more money and possessions than I need doesn’t interest me, though I wouldn’t mind seeing a little more cash in savings now than I estimate it will take to carry me through to the end of life.

Obviously, this is a subjective thing: each of us needs to weigh what really matters in our lives and decide what will make us content. Our friend Evan, for example, premises his excellent blog on his goal of reaching multimillionaire status. Yet we see that as he celebrates his thirtieth birthday, he reflects on treasures that have nothing to do with money.

There’s a difference between contentment and happiness. Would I be happy if someone gave me a million bucks? Well, sure: I’d be tickled. Would I like to have a Jaguar and a cute little BMW roadster sitting in the garage? I suppose. (Ever had to take care of a Jag or a BMW? You need an apartment over the garage for the live-in mechanic).

But would those things make my life better? I doubt it. How would a fancy car that requires constant upkeep improve on an eleven-year-old Toyota that after 106,000 miles still runs like a top and gets me where I need to go with minimal maintenance? Would a million dollars buy peace, or just give me something else to worry about?

Contentment is being at peace with one’s surroundings. It’s a long-term thing, whereas happiness is a short-term thrill.

What I want is to reach a state of serendipity. By that I mean I wish to reconcile what makes me content with the demands of the culture around me. To the largest extent possible, I would like to be free of those demands, or at least to be able to pick and choose the demands worth complying with. I can do without being badgered to pay bills, to pay taxes, to drive through homicidal traffic every day to show up at a miserable job, to care for a lot of unnecessary junk, to respond to this and that and the other requirement imposed by someone else.

While having some money helps to achieve that goal, having a lot of it is irrelevant. At some point, it’s not money that matters; it’s attitude.

To my mind, one crucial way to spring free of societal demands is to get free of debt. All debt.

Another is to reduce your psychological and social dependence on the possession of things. If debt is slavery, stuff is the slave-master.

“We got more places than we got stuff. We’re gonna have to buy MORE STUFF!” The other day  a friend who’s a mortgage broker spoke of some incredible bargain a client landed when he bought a 12,000-square-foot house in the present depressed real estate market. Think of the amount of STUFF that lucky purchaser will have to acquire!

The time wasted chasing down the stuff.

The energy wasted cleaning and maintaining the stuff.

The landfill space wasted when the stuff wears out.

Of course, if you can afford a 12,000-square-foot hovel, you can spare some of that square footage for the Jaguar mechanic who lives over the garage. And you can afford a staff of house cleaners to dust and polish your stuff.

Now you have to hire, pay, remit taxes for, and supervise those people. And you get to deal with the mountains of paperwork, workplace rules, and taxation the come the way of every employer in this country. If stress is your pleasure, now you’re in paradise: there’s nothing like management and HR tasks to add stress to your life.

How much more peaceful to own only what you really need: to have just enough around you to fit a human-sized life.

To my mind, money is another form of stuff. It’s something that has to be acquired, stored somewhere (not under the bed but in arcane spaces like the stock market, bonds, real estate, and bank accounts), and managed. It has to be dusted off, cleaned, and put back away—often by paid agents with whom, like household staff, you have to deal in ways that consume time, attention, and energy.

It’s not that we don’t need money, nor that we don’t need a little stuff. Obviously, we need a roof over our heads, a table to eat dinner at, and some pots and pans to cook in. My point is that none of us needs more than enough provide a comfortable home just large enough to house us, a healthy diet, adequate transportation, and the tools to educate ourselves and stay in touch with the people around us.

That amounts to a great deal less than a pile of junk sufficient to fill 12,000 square feet. Or even, for most families, 3,000 square feet. Or 2,000 square feet. Stuff may make us happy, but that’s temporary. Contentment is permanent, because it’s based on the things that matter.

The things that matter are, by and large, free: a growing child, a bouncing puppy,  a good friend, a beautiful day, a lovely sunset. And freedom from stress.

What, really, do you want?

Ten Ways to Deal with Bag Lady Syndrome

A comment from reader KML on my recent “bag lady syndrome” piece moved me to think more about this subject. I was going to enter a response as a comment to that post, but by the time I finished typing realized the result was itself a post. And so, more on women’s fear of a destitute old age:

Says KML: Thank goodness! I thought I was the only one who has this “syndrome” I seriously worry about being out on the streets simply bc I am single and have no one to fall back on.  I have a comfortable house, good job and a few dollars in the bank, but I still have this irrational fear.  Thanks for your post, I feel better just knowing that I’m the only one who wories about this. . . .

@ KML: It’s unclear whether a real psychological condition fitting the description of “bag lady syndrome” exists. It’s a pop-psych/pop-soc term. When you try to track down a little science on the subject, the best you come up with is that some psychologists think it’s a type of anxiety disorder.

Well, to my mind it’s perfectly rational to be concerned about whether your resources—savings, Social Security, kids who can help support you, whatever—will cover you until the end of your life, especially in a time when many people now in their 50s and 60s can expect to live into their 90s…and maybe beyond. It becomes a “disorder” when worrying about your financial security begins to inflict damage on your quality of life. Fear of destitution seems to have been observed among Americans as early as 1985, when psychologists Aaron Beck, Gary Emery, and Ruth Greenberg noted that one man anxious about the future was much helped simply by setting up arrangements to care for his family: talking with financial advisers, writing a will, taking out insurance policies.

A father’s concern about the well-being of his wife and children should he die, of course, is different from a single woman’s concern about her own future. To take advantage of a life insurance policy, you have to die…and that seems counterproductive.

However, whether you’re a man or a woman wondering about the future, I do think you can take a number of steps that help to alleviate that nagging worry:

Plan your retirement income with the help of a financial counselor.
Budget intelligently.
Try to get yourself into a paid-off dwelling, if at all possible.
If that’s not possible, seek comfortable, safe lodging at a reasonable rental.
Try to get a reliable, paid-off vehicle that will last for a long time.
As long as you’re physically able, arrange an ancillary income stream with a part-time job or by monetizing a hobby.
If you can afford it, buy long-term care insurance.
If you have a partner or a family member who will require care after you’re gone, buy life insurance.
Schedule time once a month to reconcile bank accounts and pay bills; avoid thinking about finances at other times.
Get out of the house frequently, so you don’t sit around stewing.

Most of us can do many or all of these things. And really, maybe the best thing we all can do for ourselves is to recognize when we’re worrying to much and decline to continue with it. As Scarlett O’Hara reminded us, “Tomorrow is another day.”

Financial Freedom: Own the roof over your head

Life on the treadmill

We’ve been talking, on and off, about routes to financial freedom, defined as a life off the day-job treadmill that leaves you free to do what you want to do with your time, not what someone else decides you should do. It takes time to achieve this freedom. You need get enough education or vocational training to land a job that will produce enough income to allow you to build some savings, and you need to live not only within that income but below it. An important part of your early-escape strategy is to get a roof over your head that’s paid for.

Yes. Pay off your mortgage.

In some circles, that’s tantamount to sacrilege. But the fact is, the largest chunk of cash flying out most people’s doors is the mortgage payment, and most of that payment consists of interest. The putative income tax break, if you look hard at it, is negligible compared to the amount of money that goes down the toilet in the form of loan interest. Mortgage interest can more than double the amount you end up paying for your house.

If you have a program like Quicken, it’s easy to figure that amount. Using the loan calculator, enter your principal, the interest rate, and the number of months to pay-off, and the program will generate an amortization schedule showing, in detail, how much each payment reduces the principal and how much, in total, you will have paid by x or y date. You can accomplish the same calculation, though, with Excel or an open-source spreadsheet. Over at The Simple Dollar, Trent provides an easy step-by-step guide to setting up your own loan calculator in Excel.

However you arrive at the full picture, what you find can be startling. M’hijito and I owe $211,000 on the downtown house. At 4.3 percent, over 30  years we will pay $164,907 in interest alone, meaning that if we hang onto the place that long (and it this point it appears we will be forced to do so), we will pay almost $376,000 for the house. When I bought my first house, I paid $100,000 for it, borrowing $80,000 at 8.2 percent on a 30-year traditional loan. At that rate, I would have paid $169,200 for interest alone, way more than doubling the ultimate price of the house.

Whether it’s worth that much in 30 years is beside the point. The point is, a $211,000 mortgage represents $376,000 that doesn’t go into savings. It’s $376,000 that doesn’t go toward achieving bumhood. Every month that we pay toward this loan is a month that a principal-and-interest payment of $1,044 goes into someone else’s pocket.

If he were paying toward rent instead, that also would be money down the toilet: the renter puts money in someone else’s pocket with no hope of ever owning anything and no end to the outgo. At least when you buy a house, you have a chance of paying it off and putting a roof over your head that costs you little or nothing, from day to day.

(It must be noted, though that owning your house is never free. You still will owe taxes on it, and you’re crazy if you don’t buy insurance. Maintenance and repair costs can be significant. These expenses require most mortgage-liberated homeowners to self-escrow something each month in an account to cover such costs.)

The key to bumhood is getting out of debt, and that includes mortgage debt. A thousand bucks (or more) that stays in your pocket each month represents a large fraction of the amount a bum needs to live in comfort and contentment. Given that a person who lives modestly in a city with a reasonable cost of living really needs only about $2,000 to $3,000 net a month, a thousand dollars gets you a third to half-way there!

So…how on earth do you go about doing this? The cost of a house is crushing. What human being can possibly afford to pay for one in full in anything less than an adult lifetime?

Well, I suspect most people can. Here’s the strategy:

1. Buy a house that’s within your means.

Where is it written that you have to live like Pharoah? No one really needs a McMansion. Many smaller houses offer charm, comfort, decent neighborhoods, and ease of maintenance.

If living in a prestigious district is your thing, look for middle-class neighborhoods that border fancier areas. My house, for example, is in a very ordinary neighborhood that abuts a district of million-dollar homes, two blocks from a lovely park. Obviously, if you have kids the school district is important, and so you’ll need to add that consideration into your calculation. It’s worth investigating whether sending a child or two to parochial or private school might actually be cheaper than buying a more expensive house in an area with top-rated public schools, especially if you can qualify for scholarships or tuition assistance.

2. Get the shortest conventional loan you can manage.

Because interest rates on a 15-year loan are lower than those for a 30-year loan, the payments are not that much higher. For example, with a 6.5 percent rate on a 15-year loan for my original $100,000 home, the principal and interest would have been only $128 more than what I was paying toward the 30-year instrument.

Never take on a variable-rate mortgage. Adjustable rates always adjust upwards. Even when the prime rate goes down, banks find excuses to raise the mortgage payments.

And, given the communal experience of the past couple of years, we know never to accept anything “creative” from the loan department.

3. Pay extra toward principal.

Even if you have a 30-year loan, you can speed the payoff date by paying down principal each month or, if you’re paid semiweekly, by applying some or all of your so-called “extra” paychecks to principal. Another strategy is to apply all of one spouse’s net salary to principal, if you can afford to live on one partner’s income.

The downtown house, for example, cost so much that there was no way we could have made payments on a 15-year basis. However, if we added $130 a month in principal payments, we would pay the house off in 24 years instead of 30. Applying all of his roommate’s $400/month rent payment toward principal would pay the loan in a little over 17 years. Combine the two—$130 out of our pocket and $400 from the renter—and we could kill the loan in 15 years.

4. Build side income streams and apply that money to principal.

A spouse’s salary, a second job, a roommate, a hobby monetized: all these sources of cash can be used to pay down the mortgage. Because lowering principal cuts the interest portion of future payments, it’s helpful to pay extra toward principal on a regular basis (whether it’s monthly, quarterly, semiannually, or even just once a year). But no law says the extra payments can’t be sporadic. Whenever you get a chance to earn extra money, take it, and then use the net to pay down the loan.

5. Apply all windfalls to principal.

I paid off my first house by saving every post-tax penny of spousal support (having lucked into a decently paid job) and investing it. About five years after I bought the house, I used the cash I’d saved plus a small inheritance to pay off the mortgage.

Was it easy to break a chunk out of my savings to throw at the house? Nope. Have I ever regretted it? Nope.

It probably was the smartest thing I ever did. Once SDXB moved out, I could not have paid the PITI and survived on my net income without a roommate or a domestic partner, neither of which was in the cards. The house’s value continued to grow, so that when I was ready to move to a somewhat nicer house in a quieter corner of the neighborhood, I could pay for the next place in cash. And when I was laid off my job, there was no worry about whether I would lose my home.

6. Choose your house wisely.

Purchase with an eye to staying in the place permanently. That’s right: for the rest of your life. Consider whether the neighborhood is likely to remain stable or even improve over several decades, and whether the construction will stand the test of time.

Remember, your house’s value will increase in lockstep with all the other real estate in your area. While the place may appear to double in value over 15 or 20 years, so has everyplace else! This means that if you’ve paid off your mortgage and you want to avoid taking on new mortgage payments when you move, you’ll have to buy a comparable house. Paying off a mortgage means that you’ll be living in similar housing forever, unless you’re willing to take on new debt.

As you can see, this project entails some trade-offs. Unless you earn a ton of money, you likely will not be living in an elegant palace. To get into a decent school district, you may have to take a lesser house than you could have afforded in a neighborhood with weaker public schools. And you’ll need to seek contentment and ego gratification from sources other than real estate, downsizing your housing expectations to fit your long-term goal.

Freedom’s not free. But it’s worth it.

Financial Freedom:

An Overview
Education
Work
Debt
The health insurance hurdle

Image: U.S. Air Force Photo/Staff Sgt Araceli Alarcon. Public domain.

Financial Freedom: Escape from debt and build savings

Debt and savings are directly linked. Every dollar you have to pay toward debt is a dollar you can’t put into savings.

Making your money work for you—investing plenty of savings in instruments that will pay returns that one day will support you—is key to building financial freedom. The only way you can get off the day job treadmill is to get out of debt and stay out of debt. In that respect, debt really is slavery: for those of us who are not wealthy at the outset, indebtedness means we must keep working to pay our bills. At the same time, debt sucks our savings away from us,  keeping us trapped on the treadmill of never-ending labor.

My argument is that you don’t have to be rich to be free. Instead, you need to build a comfortable lifestyle that does not require large amounts of cash flow, you need to be out of debt, and you need to establish several sources income (dividends from savings; side jobs) to help you build wealth.

The truth is, too many Americans literally are saddled with debt. The consequences of this have become obvious since the crash of the housing market: something between a fifth and a quarter of Americans owe more on their mortgages than their homes are worth. This issue has become so aggravated that many people who can in theory afford to continue making payments are choosing to simply walk away, rather than continue to throw good money after bad.

So: obviously, the best course of action is to avoid debt. When buying a house, select one whose cost is low enough that you can pay it off in 15 years or less. And in day-to-day life, never charge more on a credit card than you can pay with your current month’s income.

All of which is easier said than done.

If you’re already in debt, step one on  the road to financial freedom is to unload all revolving debt. Get rid of any department store and credit card debt—if it’s not mortgage debt, pay it off now. Any number of personal finance gurus provide lots of advice on how to get quit of debt. Dave Ramsey is probably the most popular, with his “snowball” approach to pay-off. I’m partial to “snowflaking,” proposed on the now dormant blog, I’ve Paid for This Twice Already. PT’s strategy sets a certain monthly payoff amount that exceeds the minimum required payment, and then she adds every bit of “found money” and every windfall, no matter how small. These “snowflakes” are paid against the debt immediately, as they happen.

In fact, getting out of debt is not so complicated that you have to subscribe to a guru’s system. All you need are will power, a goal, and consistent, regular payments against principal. The strategy goes like this:

1. Quit charging. Even if it means you have to parcel out your paycheck in cash secreted in envelopes to cover budget items, do not put anything on a charge card that has a balance due.

2. Pay substantially more than the minimum due against all charge-card and car loan balances. If possible, consolidate credit-card debt onto one card and pay that down as fast as you can.

3. To accomplish this:

a) Live frugally. Economize tightly until you can get rid of the debt.
b) Develop a second income stream and devote all of it to paying off debt.

The immediate goal, of course, is to get rid of noxious debt that cuts your buying power. Every penny you pay in interest for something you bought on time reduces the value of your dollar. So, if you’re paying some bank 21 percent for the privilege of buying things on its card, every dollar you spend on the merchandise is actually worth only 79 cents. That’s how much credit-card debt shrinks your standard of living!

But the long-term goal is freedom: financial freedom. Once you’re rid of revolving debt, you can work toward buying your shelter free and clear. And when you have that, you’re more than halfway to the exit from the day job.

After you’ve succeeded in paying off credit-card debt, it’s time to shift strategies. Now you have a newfound cash flow: the chunk of cash that was going to pay creditors is coming to rest in your bank account!

Hawai’i beckons. But resist the call.

Instead of diddling away your new real income, continue to live below your means. When using credit cards, never charge more than you can pay at the end of the current month’s billing cycle. If you find you can’t control spending on cards, then pay for everything in cash. This strategy will maximize your actual income. Instead of holding your salary less what you owe to lenders, your bank account will contain…yes! Your salary. Your whole net salary.

By living below your means—a habit you’ve already developed while paying off the cards—you will accrue money to put into savings. Take all the money you were spending on servicing debt and stash it in mutual funds. Some should be in a stock fund, some in a bond fund, and some in cash (i.e., the money market, CDs, or treasuries). This creates a kind of hedge: as a general rule, when stocks are up, bonds go down; when stocks go down, bonds rise. Because you earn more in the stock market, over time, than you do in the bond market, it’s a good idea to have somewhat more than half your investments in stock funds. To avoid being ripped off by fees, choose a low-overhead mutual fund issuer such as Vanguard or Fidelity. Arrange for dividends to be reinvested, and at the same time send in a set amount to each fund every month.

Do this above and beyond any 401(k) or 403(b) plan your employer offers. If your employer matches your retirement contributions, do not neglect to participate in the job’s plan. Even if there is no match, a 401(k) or 403(b) may allow you to contribute more pre-tax dollars than you can put into a regular IRA. Check. Also find out if you can put money into a Roth IRA, and if so, how much. Roths are preferable to regular IRAs because, even though you fund them with after-tax dollars, you don’t have to pay taxes on their earnings and you can pass the money to your children without having the government take the lion’s share.

In any event, the point is to get yourself into as many savings schemes as you can. If your employer offers a savings or a pension plan, by all means enroll in it. But also save and invest on your own. Your employer’s plan should never be your only investment.

At this point, you have laid the three building blocks for financial independence:

1. Live below your means.
2. Develop more than one income stream.
3. Save and invest all funds not needed to cover living expenses.

You now have only one remaining challenge: Get a roof over your head that costs you close to nothing. Once you have that, financial freedom is within your grasp.

More, then, to come…

An Overview
Education
Work
Debt
The health insurance hurdle
The roof over your head

Should you pay off your mortgage?

Preparing to write the next installment in a series on achieving financial freedom, I ran some figures to compare the result of paying down a mortgage with extra monthly payments toward principal with investing the same amount monthly in a mutual fund. What I discovered runs against my theory that you’re well served to pay off a mortgage as fast as you can.

I still think that’s true if you’re getting close to retirement. In retirement, every debt should be wiped off your books, because you will need all your cash flow to live on. However, if you’re younger—say, anywhere between 20 and 45—and your mortgage rate is low compared to returns on equity investments, it would be to your advantage to invest extra dollars in a mutual fund earning around 8 percent. At today’s rates, this strategy allow you to accrue enough to pay off the principal faster than will throwing a monthly amount at the loan principal. Here’s how this shakes down:

M’hijito and I have a 30/15 mortgage at 4.3 percent. This means that for the first 15 years, we make payments at the 30-year amortization rate, but after the 15 years have passed, we either have to pay off the loan or we have to refinance it. The loan’s principal is $211,000.

We chose this mortgage because, at the time we bought the house, we believed the real estate market was nearing the bottom. We believed the house would drop in value another $4,000 or $5,000 and then begin to rise, probably at around 3 percent p/a. We figured that in five to ten years we could sell or rent the house and either break even or make a small profit. As everyone now knows, this was dead wrong: in fact, real estate was in free-fall, and the house is now worth at best $170,000, but more realistically around $150,000. This turns the loan into a real albatross. One strategy we are considering is to try to pay down principal with whatever extra monthly payment we can make (which ain’t much!), so that in 15 years, the amount to refinance might at least be no more than the house is actually worth, possibly allowing us to sell the house at that time.

In 15 years, with no extra payment toward principal, the loan balance will be $138,338. Monthly principal and interest payments are $1044; PITI comes to something over $1200.

Note that the projected loan balance is less than the most pessimistic present-day valuation. If the market finally has bottomed out and housing increases in value at 3% a year (a figure that is now being bandied about), in 15 years the house will be worth $233,695. That is less than we paid for it, but at least if we sold the house at that time we would walk away with a little cash in our pockets.

With me out of work, about the most we can afford to pay extra toward loan principal is about $100 a month.

Using Excel’s full value (=FV…) formula, I calculated the the return on a $100/month investment in a mutual fund earning 8% per annum. (Over at Vanguard, a number of stock funds and even a few bond funds are returning at this rate; one of them is Windsor II, in which I happen to already have a little cash.) I then used Quicken to run an amortization schedule, and compared the amount a $100/month investment would be worth in 15 years with the amount an extra $100/month principal payment would reduce the loan balance.

Assuming that our mutual fund investment averaged an 8 percent return, if we sent Vanguard $100 a month, in 15 years we would accrue $34,604 (full value =(.08/12,15*12,-100). If we paid an extra $100 a month toward the loan principal, in 15 years we would have paid the balance down by an extra $18,000 ($100 x 180 pay periods). According to Quicken, we would still owe $113,116.

With no extra payments, remember, we would still owe $138,338.

$138,338 – 113,116 = $25,220

Compare that with the $34,604 we would have earned in the mutual fund. Clearly, we would be ahead—by over $9,000!—by investing the money in a mutual fund with low overhead, such as Vanguard and Fidelity offer.

Well, now. Suppose you were not out of work, and so had plenty of cash to throw at the principal. Let’s suppose you really have plenty of cash and you decide to pay the equivalent of an entire P&I payment toward principal. Then what?

If you put $1,044 into a mutual fund every month, in 15 years you would have $361,264. If you paid $1044/month toward principal (in addition to your regular payment) on a $211,000 loan, you would pay off the loan in 10 years.

But by putting the cash into a mutual fund returning 8 percent, in 10 years you’d earn $190,995. Since in 10 years, with no extra payments, your loan balance would have dropped to $167,901, you’d still come out ahead:

$190,995 – $167,901 = $23,094

In other words, if you put the amount of an extra loan payment in an 8% investment, in ten years you would have enough to pay off the mortgage and still leave $23,000 in your pocket. If you used the same amount to pay toward the loan once a month, you would pay off the debt but would have no cash left over.

The conclusion is obvious: If your goal is to pay off your mortgage, you’re better off investing a regular payment in a decent mutual fund than paying the same amount toward principal.

This assumes your mortgage interest rate is lower than the rate of return from an equity fund. Note also that my figures do not take into consideration the small tax advantage gained by paying mortgage interest; this factor also would tend to improve the picture if you invested in the market.

Risky? Sure. But we now know that investing in real estate is wildly risky, too: more so, it develops, than the stock  market. My stock investments are rapidly regaining their pre-crash value, but there’s no credible sign of any recovery in the real estate market here. Even if the value of the house starts to increase at 3% p.a. today, in 15 years it won’t be worth anything like what we paid for it. If property values remain flat for any length of time (as it appears they will), we will lose not only our shirt but our pants, socks, and underwear.

I used to think my father was crazy because he refused to buy a  house until after he had saved enough to pay for it in cash. All the time I was growing up, we lived either in company housing or in rentals. His reasoning indeed was crazy—he bought into The Protocols of Zion, an irrational tract that led him to believe all mortgage lenders were part of a hallucinatory international Jewish conspiracy. However, the effect was that when he retired at the age of 53, he had enough cash to buy a house and a car and to support himself and my mother in a middle-class lifestyle without having to work.

Crazy like a fox, that old boy was.

A rabid fox, but still…