Pay off mortgage or make monthly payments and invest the rest?

[Jhconnected]

I’m in my 20’s. Have some money I would like to invest. I have a retirement plan with work and an additional 457b plan with work. I would like to start putting money away else where. I was told by a buddy with a business degree there are better options than a Roth IRA. Looking for input on this. Definitely not my specialty area.

Id be interested in hearing his recommendations.

The standard gameplay for saving for retirement is invest in 401k to meet company match then max out Roth IRA then invest more in 401k. Rule of thumb recommendation is 15% of income but if you can invest more while young it will do more work for you later.

However, perhaps the best retirement plan is the HSA if your company does a HDHP with HSA. It was designed for health costs and can be used for that but it is triple tax advantaged in that money goes in untaxed, money grows untaxed and money CAN come out untaxed. No other savings plan offers this.

You can pull money out tax free if you have qualifying health receipts or if you’re past a certain age.

The idea being if you max out your HSA (typically your company throws some in as well) and you pay all healthcare costs out of pocket (this is easier said than done but if you’re young and healthy you may only go to the doctor once a year). Save all healthcare receipts in case you need to pull money out but try not to. Once you get a certain balance, like $2000, you can start investing the money. But you just keep stashing money until you hit the age when you can pull it out tax free no receipt required.

There is no other plan like the HSA that allows you to completely circumvent taxes (unless you are wealthy and can do other things).

I am not a financial advisor and any advice you take you’re taking at your own risk. lol.

 

[WhatToHunt]

Great points by @Jhconnected on the HSA, I've heard it described as the ultimate retirement account for the reasons noted.

Personally I max out my 401k, then the Roth gets maxed, then if there's any additional money it goes into a brokerage account - all three accounts in index funds (VTSAX primarily). My goal is to maximize my tax benefits now via the 401k, then later do a Roth conversion.

 

[Jhconnected]

Great points by @Jhconnected on the HSA, I've heard it described as the ultimate retirement account for the reasons noted.

Personally I max out my 401k, then the Roth gets maxed, then if there's any additional money it goes into a brokerage account - all three accounts in index funds (VTSAX primarily). My goal is to maximize my tax benefits now via the 401k, then later do a Roth conversion.

Ageeed with Index funds. Low cost high yield (over 10+ years) is the way.

You’re playing the long game. Look for stuff with consistent growth over the long term. The typical recommendation are S&P500 Index Funds (SPY, VOO, etc) and your 401k and IRAs will have them too.

 

[SloppyJ]

I paid mine off a few years ago (35) and love it. Allows me to go and do however I want for the most part and save quite a bit monthly. I like the added security if something happens to me, my wife and kids have a home and I have insurance policies as well. Just my .02. I think you have to do whatever you feel is best for you and your situation!


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I'm leaning towards this more and more every day. The peace of mind seems to outweigh other options but compound interest on a large sum of cash is pretty attractive too. Right now I'm stuck trying to decide.

 

[go_deep]

Everything I own, every dollar I have will be someone else's someday, likely sooner than later. Pay it off, and go enjoy life with less worry.

 

[TaperPin]

Once again private equity bought the company a friend has worked a decade at and is slowly gutting benefits and reorganizing to cut salaries. Like a frog in a pot slowly increasing to boiling temperatures, savings and investments get drained hoping things will get better and the new company will hold up their hollow promises. Add in a 20 year old daughter that started having seizures, can no longer drive and had to move home. She finally jumped ship to regain some of her lost salary, but had the house not been paid off she would have lost it.

It’s human nature to not believe how bad things will get quickly.

Another professional couple in their 40s we know had a double hit this past year - she has really bad long Covid and was let go for bad performance and he had a heart attack. Talk about burning up savings and investments quickly.

Live simply, pay things off, invest the rest.

 

[180ls1]

Once again private equity bought the company a friend has worked a decade at and is slowly gutting benefits and reorganizing to cut salaries. Like a frog in a pot slowly increasing to boiling temperatures, savings and investments get drained hoping things will get better and the new company will hold up their hollow promises. Add in a 20 year old daughter that started having seizures, can no longer drive and had to move home. She finally jumped ship to regain some of her lost salary, but had the house not been paid off she would have lost it.

It’s human nature to not believe how bad things will get quickly.

Another professional couple in their 40s we know had a double hit this past year - she has really bad long Covid and was let go for bad performance and he had a heart attack. Talk about burning up savings and investments quickly.

Live simply, pay things off, invest the rest.

This is counterfactual. Had your friend invested the excess instead of put it in an illiquid asset, she would likely have been much better off.

The argument is centered around investing excess cash-flow.

Your scenario is positioning someone who saved it by paying off their house vs her blowing it and not investing; of course the paid off house wins. However, you completely missed the point.

 

[wyosam]

I’m a fan of pay it off. Other than a couple years worth of student loan payments (mid life career switch, including a graduate degree that it turns out I neither want nor need), we’re debt free. Try to pay cash for things, even though we could certainly buy nicer stuff (ie, bought an older boat for the salt, and bought an older truck when I needed to upgrade to 3/4 ton to pull this one). There are times I feel dumb for driving a 23 year old truck, but I REALLY like the fact that our monthly nut can get really small if something happens.


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[TaperPin]

This is counterfactual. Had your friend invested the excess instead of put it in an illiquid asset, she would likely have been much better off.

The argument is centered around investing excess cash-flow.

Your scenario is positioning someone who saved it by paying off their house vs her blowing it and not investing; of course the paid off house wins. However, you completely missed the point.

It’s a tough world out there and the more bullet proof someone can make their life the better. On paper I totally agree it looks like everyone should be as leveraged as possible and there is never a reason to ever pay off a low interest mortgage. Heck, on paper convincing every member of your family with a paid off house to get a mortgage to allow you to invest that money sounds good, but sometimes life comes at people fast and what seemed like a good idea quickly becomes a liability. It’s human nature.

 

[WhatToHunt]

Once again private equity bought the company a friend has worked a decade at and is slowly gutting benefits and reorganizing to cut salaries. Like a frog in a pot slowly increasing to boiling temperatures, savings and investments get drained hoping things will get better and the new company will hold up their hollow promises. Add in a 20 year old daughter that started having seizures, can no longer drive and had to move home. She finally jumped ship to regain some of her lost salary, but had the house not been paid off she would have lost it.

It’s human nature to not believe how bad things will get quickly.

Another professional couple in their 40s we know had a double hit this past year - she has really bad long Covid and was let go for bad performance and he had a heart attack. Talk about burning up savings and investments quickly.

Live simply, pay things off, invest the rest.

I can see this side of things. But I like to think it's more of not will get bad, but what "can." What I mean is, I won't ignore the bad that could happen, but I won't let those possibilities entirely dictate how I plan for the future. I'd think overall people are statistically more likely to not lose there job, not get cancer/illness, not die young, etc. So if I plan to live a long life (fingers crossed), I'd rather have the funds available for that long life without having to work until I'm 70. If, God forbid, I do get seriously ill or lose my job, I may have to dip into that nest egg to get me through (i.e. not lose my house). But I'd likely, relatively, be in a similar financial position overall had I not used the math in my favor: invest at ~10% vs pay off ~3% mortgage.

My wife and I both have a higher risk of cancer due to family history for her and an autoimmune disease for me. But higher risk doesn't mean we "will." Having said that, we'd know which of our investments we could pull from early if life hit the fan.

We could all look to extreme/rare examples, but those are not the norm.

Live below or within your means, don't go into extreme debt, invest wisely and/or aggressively depending on age, be aware of how you'd tackle unexpected financial strain.

 

[180ls1]

It’s a tough world out there and the more bullet proof someone can make their life the better. On paper I totally agree it looks like everyone should be as leveraged as possible and there is never a reason to ever pay off a low interest mortgage. Heck, on paper convincing every member of your family with a paid off house to get a mortgage to allow you to invest that money sounds good, but sometimes life comes at people fast and what seemed like a good idea quickly becomes a liability. It’s human nature.

lll disagree here as well. It’s not a good idea to be as leveraged as possible, although you are the only one making that assertion.

Also, there are reasons to pay off a low interest mortgage.

 

[NevadaMike]

I’m in my 20’s. Have some money I would like to invest. I have a retirement plan with work and an additional 457b plan with work. I would like to start putting money away else where. I was told by a buddy with a business degree there are better options than a Roth IRA. Looking for input on this. Definitely not my specialty area.

Fellow public employee here with an MBA that retired early. Avoid online advice and seek advice from the 457B administrator but keep in mind they have motivations too. Put in the max you can afford. I choose to suggest to my kids to use Vanguard target date funds. It's simple and automatic with low fees and that makes a huge difference over time. One thing I will say is never hire a commission based advisor!

 

[DangerRanger]

Mine is 3% and we chose to invest. For me it checks all the boxes as I could always pull the money and put it towards the mortgage if needed in an emergency that outlasts my emergency fund. We are just dumping money in VOO

 

[HornPorn]

It would be great on these financial topics if the posters net worth was displayed under their user name.

 

[go_deep]

It would be great on these financial topics if the posters net worth was displayed under their user name.

Single family income, under $100k income. Debt free @ 43 years old including the house, you just have choose what's important for awhile.

 

[IdahoElk]

I paid mine off and am investing. For me the piece of mind was worth it.