Kelley wrote recently with the sort of dilemma I get asked about all of the time: Is it better to invest or to prepay a mortgage? We’ve covered this topic in the distant past, but it’s time to review the debate for current readers. First, let’s look at Kelley’s e-mail:
My husband and I are on the right track. At age 25, our only debt lies in our home mortgage. We have the six-month emergency fund in place, I currently meet the 3% 401(k) match offered by my employer, and I started a Roth IRA for myself and my husband last year. I started each Roth IRA with $4,000.My financial advisor recommended for us to max out each of our Roth IRAs each year. My husband disagrees. He thinks paying off the house is a bigger priority. Starting this year, we’ve made an extra payment on our house each month. If we continue doing this, we can have our house paid off in nine years rather than 30 years. However, we can’t do both.
Currently we’ve decided to throw $1,000 into each Roth each year until the house is paid off. Is this the wise decision? Or is it better to put more toward the Roth IRA and less toward the house?
I understand either option is good because I’m saving money. I’m just curious of which route would be wiser.
Kelley’s right: Both of these options are good. This is like choosing between an apple and an orange. Both taste good, and they’re good for you &madsh; but is one better for you in the long run?
What the experts say
Three years ago, when we last covered this topic (holy cats! — where has the time gone?), I collected the following roundup of advice from personal-finance books:
- Ric Edleman (Ordinary People, Extraordinary Wealth): Never own your home outright. Instead, get a big 30-year mortgage and never pay it off — regardless of your age and income. “Every time you send an extra $100 to your mortgage company, you deny yourself the opportunity to invest that $100 somewhere else.”
- Suze Orman (The Laws of Money): Invest in the known before the unknown. Paying off your mortgage offers a guaranteed return on investment. “You cannot live in a tax return. You cannot live in a stock certificate. You live in your home.”
- Elizabeth Warren (All Your Worth): Save 20% of your income. Use 10% for retirement savings, 5% to accelerate your mortgage, and 5% to save for future dreams. “Paying off your home also does something many financial planners neglect to mention: It gives you freedom. Once that mortgage is gone, just imagine all the freedom in your wallet.”
- Dave Ramsey (The Total Money Makeover): Prepay your mortgage if you can, but only after you’ve saved an emergency fund, and only if you’re putting at least 15% of your income toward retirement. Don’t use a program designed by a broker; use your own self-discipline.
- Dominguez and Robin (Your Money or Your Life): “Pay off your mortgage as quickly as possible.” This book, too, was written when interest rates were higher. Also, the authors emphasize frugality over investing.
Financial authors don’t agree on this subject. Maybe the personal finance gurus writing for the web can clear things up?
- Liz Pulliam Weston at MSN Money: Don’t rush to pay off the mortgage. “You’ve got better things to do with your money, like saving for retirement, building an emergency cushion or even living it up a little.”
- Walter Updegrave at CNN Money: If you’ve funded your retirement, and if it will make you happy, then pay down the mortgage. Otherwise, it makes more sense to invest.
- Laura Rowley at Yahoo! Finance: Using very conservative figures, investing instead of prepaying the mortgage yields an extra $400 per year. If you feel compelled to pay down your mortgage, do it. But realize you’re paying a price to do so. (She offers more details at her blog, as well as tips on how to estimate the investment return you need to earn to make it worthwhile.)
- Bankrate: Pay down your mortgage if your investments would be conservative. Invest if you’re planning to do so for the long term.
- USA Today: It depends on your income, your monthly expenses, your risk tolerance, and your desire to own your home free and clear.
- Kiplinger’s: Invest unless you’re near retirement
- The Dollar Stretcher: Mathematically, it makes more sense to invest, but it all depends on your risk tolerance.
- My fellow pfbloggers at Bargaineering and Million Dollar Journey recommend that a person do a little of both: pay down the mortgage some and invest some. Free Money Finance says: “If you have the discipline to save/invest the money you would be using to pay off the mortgage, it’s likely that saving/investing is the better option. But if you’re more the “average” person out there managing your money, I still believe it’s a better option to pre-pay your mortgage.”
The Rowley article offers some interesting background to this debate:
Why do so many people choose to put extra money into a mortgage when other options would likely increase their wealth? “This is really remnant of Depression mentality that has persisted from generation to generation,” says [one expert]. At the time, most mortgages had one- to five-year terms, with a lump sum payment due at the end.“Any shock to income meant you couldn’t afford your payment — mortgages were much more susceptible to economic uncertainty,” [the expert says], and roughly one-quarter of Americans were unemployed during the Great Depression. “It’s fine to pay down your mortgage if it gives you peace of mind, but you should recognize what that peace of mind costs.”
If you’re facing a similar decision, you may find this calculator useful: prepaying your mortgage vs. investing.
The bottom line
My conclusion in 2007 (and the one I still hold today) is that unless your mortgage rate is very high, it makes more sense mathematically to invest your money. But most gurus agree that psychologically, you should do what works for you. If paying off your mortgage would take a weight off your shoulders, then pay off your mortgage. Sure, you might be losing a bit in the long-term, but you’re still making a smart choice. As I said earlier, it’s like choosing between an apple and an orange. One may be better for you, but they’re both good.
Ultimately, I kind of like the choice that Kelley and her husband have made. They’re prepaying their mortgage and putting some toward retirement. But enough of what I think. Kelley really wants to know what you think.
Which option is better? Should she and her husband be pumping as much as possible into their Roth IRAs? Or should they be paying down their mortgage as quickly as they can? Have you been faced with a similar dilemma in the past? What did you choose to do? And would you make the same choice again?
- Colbert King:
Family, marriage and the contribution of fathers come together as topics for reflection on Father's Day. So I'd like to know why Barack Obama, a husband and a father in a family structure that encompasses bonds deemed essential to our society, is constantly and savagely attacked by conservative leaders whose personal circumstances undermine the family values they espouse?
Consider Obama: Raised by a single mother in a middle-class family where hard work and education were watchwords, Obama graduated from two of the top schools in the country, Columbia University and Harvard Law School. His legal scholarship was recognized when he became the first African American president of the Harvard Law Review. He married and, equally important, has stayed married to Michelle Robinson, a Princeton graduate and Harvard Law alumna. He lives with his wife, two children and his mother-in-law. Obama: constitutional law professor, civil rights lawyer, state legislator, U.S. senator, 44th U.S. president, family man.
Now let's turn to Obama's foremost critics: Rush Hudson Limbaugh III, Newton Leroy Gingrich and Sarah Palin.
- Eighty-five percent of Swedish fathers take parental leave. It's expected, both by employers and society as a whole.
In this land of Viking lore, men are at the heart of the gender-equality debate. The ponytailed center-right finance minister calls himself a feminist, ads for cleaning products rarely feature women as homemakers, and preschools vet books for gender stereotypes in animal characters. For nearly four decades, governments of all political hues have legislated to give women equal rights at work — and men equal rights at home.
Swedish mothers still take more time off with children — almost four times as much. And some who thought they wanted their men to help raise baby now find themselves coveting more time at home.
But laws reserving at least two months of the generously paid, 13-month parental leave exclusively for fathers — a quota that could well double after the September election — have set off profound social change.
- In 2002, a telecommunications engineer with dual Canadian/Syrian citizenship was seized from JFK airport, held in solitary confinement for two weeks without adequate access to an attorney, then sent to Syria, where he was imprisoned for a year and tortured. Then, he was released back to Canada. Jeralyn explains that although the Supreme Court denied cert in his civil lawsuit against U.S. officials, at least someone official is investigating. The Royal Canadian Mounted Police.
- Blackwater is awarded a new contract -- under another name, of course -- to guard U.S. consulates in Afghanistan. --Susan Gardner
- Republicans just can't help revealing their unhinged extremism, and no matter how many times they later backtrack, they are what they are.
The Republican nominee for a northern New Mexico congressional seat suggested during a radio interview that the United States could place land mines along the Mexican border to secure the international boundary.
Asked Monday to clarify, Tom Mullins emphasized that he does not advocate doing so.
He was just making conversation. Or something.
- Dahlia Lithwick:
Almost two weeks ago, former Supreme Court Justice David Souter gave the commencement speech at Harvard, a speech that's been variously described by some of my favorite legal writers as a denunciation of "originalism," a defense of "living constitutionalism," and a suggestion that "judicial activism" is a game both liberals and conservatives can play. But the striking aspect of Souter's remarkable speech is that it rejected virtually all of these easy ideological labels and addressed itself to two much simpler questions: Is the meaning of the Constitution clear? And is the task of divining that meaning easy? These incisive questions themselves beg an even more pressing constitutional question: Why must justices first leave the bench before they can speak seriously about the importance of the court?
- Science Daily:
Advances in high-yield agriculture over the latter part of the 20th century have prevented massive amounts of greenhouse gases from entering the atmosphere -- the equivalent of 590 billion metric tons of carbon dioxide -- according to a new study led by two Stanford Earth scientists.
- Andrew Lawler, in Science Magazine:
After decades of taboo and controversy, Pacific Rim archaeologists are finding new evidence that Polynesians reached South America before Europeans did, voyaging across the world's largest ocean around 1200 C.E.
- Cynthia Tucker's reaction to President Obama's energy speech was concise and pointed.
- Diego Valle makes a comprehensive analysis of the Drug War in Mexico. Suffice to say that the present strategy isn't working. If you don't have a lot of time, just scroll down to his conclusions.
- Europe's recession might bring down Germany's Merkel government, and is leading to a rise in xenophobia and racism.
- Markos linked this, last week, but it deserves an encore. After taking apart the canard that Social Security is going broke, digby ends with this gem:
Any deficit scold who doesn't put reducing health care costs at the very top of the agenda is just a demagogic crank doing the dirty work for the aristocratic overlords.
- Defense Secretary Robert Gates claims Iran could launch hundreds of missiles into Europe. At least he didn't claim it could be done in 45 minutes.
- Pretend you're surprised:
Recent setbacks in Afghanistan have intensified debate over the wisdom of the Obama administration's plan to begin withdrawing U.S. military forces next summer and highlighted reservations among military commanders over a rigid timeline.
At a Senate hearing Tuesday, Gen. David H. Petraeus, who oversees U.S. forces in the Mideast and Afghanistan, offered "qualified" support for President Obama's plan to begin withdrawing troops in July 2011.
You have to admire the logic. The worse things get, the longer we have to stay.
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"Be All You Can Be" is not just a slogan for military recruiters, but a challenge we can all embrace. Below are mini-reviews for ten books that can contribute to a better you. Not just "self-help" books, they are books about travel, personal finance, mental health, as well as several thought-provoking biographies and books about achieving career goals. All are readily available for purchase or library borrowing and highly recommended for a broad readership across genders and age groups.
Staying Positive
Always Looking Up: The Adventures of an Incurable Optimist by Michael J. Fox, Hyperion Books, 2009.
This autobiography of the beloved television and film actor centers on the ten years since he left Spin City due to increased symptoms of Parkinson's disease. It is inspiring but never maudlin, factual but also gives a lot of insight into the way Fox has coped emotionally and even grown in the past decade. It is well worth reading even if you are not a hard core Michael J. Fox fan and never saw Back to the Future I, II, or III.
One Less Thing to Worry About: Uncommon Wisdom for Coping with Common Anxieties by Jerilyn Ross with Robin Cantor-Cooke, Ballantine Books, 2009.
Jerilyn Ross is a practicing psychotherapist and an expert on anxiety. In this book she addresses some anxieties experienced by many and provides useful and engaging case studies. This book can help those who feel that their anxiety is not well-controlled, whether or not they have an official "anxiety disorder." This book is neither super-clinical and jargon laden, nor is it superficial and sensationalistic. It falls in the middle realm of practical, readable material about an important health-related topic.
Career
The Presentation Secrets of Steve Jobs: How to be Insanely Great in Front of Any Audience by Carmine Gallo, McGraw-Hill, 2010.
Although Steve Jobs expounding on Apple products at a MacWorld Expo is front and center on the cover of this book, the book was not endorsed or approved by him. Instead, it consists of Ms. Gallo parsing, analyzing, and learning from the techniques he has used in his well-known presentations to industry insiders and Apple faithful. Jobs is an interesting case study, since he is so well known. Although he does not have the classic salesperson manner, he may be the computer geeks' salesman of choice. There are lessons we can learn from Jobs as a presenter and from this book.
Your Next Move: The Leader's Guide to Navigating Major Career Transitions by Michael D. Watkins, Harvard Business Press, 2009.
This book is a follow-on to Watkins' successful The First 90 Days, which gave advice to managers transitioning into a new organization. In Your Next Move, he explores other scenarios, including promotion, turning a business in crisis around, and making an international move. Anyone who holds a management role in a large organization or aspires to do so in the future will find this book interesting and perhaps enlightening.
Global Perspective
Three Cups of Tea: One Man's Mission to Promote Peace...One School at a Time by Greg Mortenson and David Oliver Relin, Viking hardcover 2006, Penguin paperback, 2007.
Greg Mortenson is a large quirky American guy who morphed from a nurse cum recreational mountain climber into a global humanitarian raising money to build schools where there were none. His work in the mountainous rural regions of Pakistan and Afghanistan is chronicled in this bestselling book by journalist David Relin. I heard Relin speak about writing this book and left very impressed by the accomplishments of Mortenson despite his feet of clay.
1000 Places to See Before You Die by Patricia Schultz, Workman Publishing Company, 2003
This book is a modern classic and was number one on the bestseller lists; its clever title has given rise to many spinoffs written by other authors, including 1000 Recordings to Hear Before You Die and 1000 Historical Sites to See Before You Die. Schultz spent seven years researching and writing this ambitious book. In the introduction she explained why:
"With travel, our minds become more curious, our hearts more powerful, and our spirits more joyous. And once the mind is stretched like that, it can never return to its original state."
In 2007, Patricia Schultz published a version of the book limited to sites in the U.S.A. and Canada.
Your Stuff
The Get Organized Answer Book: Practical Solutions for 275 Questions on Conquering Clutter, Sorting Stuff, and Finding More Time and Energy by Jamie Novak, Sourcebooks Inc., 2009.
Jamie Novak is an organizer who has been featured on the television program Mission Organization—the more sedate version of Clean House. As a person who needs a lot of organizing, I have a whole collection of books on this topic. I like the Answer Book because it is well organized! (Imagine that: a book about organization that is well organized!) The Q and A format makes it easy to hone in on topics of interest.
Cool Green Stuff: A Guide to Finding Great Recycled, Sustainable, Renewable Objects You Will Love by Dave Evans, Crown Publishing Group, October 2007
This book will fascinate readers who think shoes made of recycled seatbelts, chandeliers made of party favors from the millennium celebrations, and jewelry made from vinyl records are cool. It contains photographs and website addresses for these treasures. Reviewers describe it as fun, creative, and very entertaining to read or leaf through—a small coffee table book. In fact it includes a coffee table made of coffee grounds!
Personal Finance
The Number: A Completely Different Way to Think About the Rest of Your Life, by Lee Eisenberg, Free Press, 2006.
Lee Eisenberg muses on "the number"—that is, the amount of money one needs to have saved in order to retire, or semi-retire. For many years Editor in Chief of Esquire magazine, Eisenberg left the hustle and bustle of New York for a calmer but less lucrative existence elsewhere. He uses his own struggle with the concepts of retirement and financial security as a way of exploring the concepts universally. It is written in a lively, literate style and very thought-provoking.
Making the Most of Your Money Now by Jane Bryant Quinn, Simon and Schuster, hardcopy, revised 2009.
I have had great respect for Jane Bryant Quinn as a sensible and comprehensive money guru for decades. However, her books of the 1980's needed updating for all the economic upheavals since. She has fully revised her near-encylopedic money management manual (1,264 pages) and published a new version as of December 2009. Her book is organized topically so you can dip in and read about whatever you need at the time—the basics of life insurance, paying for college, investing, etc. Her book is not flashy, not gimmicky, not pitched to the wealthy or the high rollers. It is good solid information and advice for most people and written in a clear, understandable style.
Conclusion
This list of ten suggested books to make a better you is far from exhaustive. Depending upon the areas in which you seek enrichment, growth, or improvement, you may find additional books or more specialized books appropriate. But this is a good starter set for almost anyone of a mind to be all you can be.
Sources:
Books cited above
Personal opinion and experience
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