I don’t set goals. But I do get set in my ways. Since I’m so charming, it all works out. Right? Riiiiight. For more than the past year, we have implemented the exact same approach to paying down debt and investing–do both as well as we can. And it’s working. But I also wonder if it’s working as well as we think.
How We Destroy Debt
I won’t belabor the point here. Mostly because if I do, I’ll have nothing to write about for our Q2 mortgage update. But the very condensed version is this:
- Our mortgage is debt.
- Debt sucks.
- I want it gone*.
*And I want it gone much faster than the 26 years we have left on paper.
As a result, we currently double our payments every month and toss some extra side hustle money at it on occasion. That might will change now that we’re planning for Half Penny. Mostly because you all told me I had to. See, I do listen!
How We Invest
Currently, we use three different investment vehicles: pensions, Roth IRAs, and a taxable savings account. Of the three, there’s only really one that I would classify as truly investing. Because one is so tiny and the other might very well be a fantasy concocted by the state of Illinois.
Our Roth IRAs are our prize investments. Mostly because we’ve been maxing them out for a few years and also because I finally learned to stop having a stroke over every little blip on Vanguard. Which basically means there haven’t been many blips as of late, and I’ll go back to hyperventilating or having Mr. P change my password if and when the correction comes. Be cool, stock market. Be cool.
Then there’s the great experiment: our taxable savings account. You read one Bogglehead book and suddenly you’re an expert. Just kidding. I’ve read it 2.5 times, and it still makes me want to cry in some parts. But this account is basically a way for us to test the waters beyond our Roths. We’d like to earn more than 1% on our savings, so we opened the account. But we’ve been slow to funnel money into it because two people in grad school can be really expensive. Ditto for babies. While we do try to grow this from month to month, we don’t currently contribute a set amount. It’s more like whatever is leftover.
And now the fantasy. Unlike Beetlejuice, the more someone says the word pension, the less convinced I am that it will ever appear. The state already pulled the plug on one part of our pension and kindly gave back all the money I put into that small portion over the past nine years. Sans interest. Because Illinois is fun like that. Currently, we both put just over 9% of our salaries towards each of our respective pensions. There’s no match. Zilch. Zip. Zero. And the truly scary part is I have no idea how it’s being invested. Or if it’s being invested. Truth be told, the last time my account was updated was in 2015. So maybe I’ll be in my 60s and realize that I’ve got it made in the shade thanks to my pension. But my fear is that it’s going to be a lot like opening a box of Girl Scout cookies expecting a jackpot only to realize there’s one left. Not that that would ever happen in our house. Right, Mr. P? So maybe pensions aren’t that sweet after all.
Is This The Right Approach?
Just typing this all out in one post makes it really seem like we have this debt and investing business all figured out. OK, maybe not all figured out. Maybe not even close. But we’re making a little dent. The real question, though, is could we be making a bigger dent if we focused more singularly?
We can’t opt out of our pensions, but we certainly could forgo the Roths. Though, just typing the second half of that sentence made my palms sweat. It seems that the only option worth considering would be to skip the taxable savings account or even cash it out and use it for other obligations.
The flip side, of course, is to cool it with the debt repayments. The thought of being shackled to a bank loan until my kid is out of college is more than a little repulsive to me. But imagine if we had taken all those extra payments and we’d tossed them in our taxable for the past year or two. Market magic. But what if we made the same decision in 2008? Or even when we first opened our Roths with Vanguard and couldn’t get out of the red for anything? There’s no timing the market. It’s just one more question mark in life.
So Tell Me…What path do you choose? How do you make your money work for you if you have debt to pay and investments to make?
Hey Penny another awesome post 🙂 I pay down debt and invest at the same time. Every week I get paid I automatically have money go into investments. Although I would definitely lean towards paying debt faster as I hate debt.
Have a great day 🙂
Take it for what it is worth (not much), but this is what I’d do…
I’d figure out that pension. I personally know next to nothing about pensions b/c I’ve never had that benefit / option, but what’s the benefit of putting 9% into it (tax perhaps?). But putting 9% into something that you don’t know how it is invested and relying on the State of Illinois would scare me.
Keep going with the Roths no matter what. Those tax benefits are gold and if you miss a year of investing in it, you can never go back to that year to make it up. Tax benefits of that money not invested is lost forever. And also never pull money out of it…tax benefits lost.
Again, just me, but I am comfortable with super low rate debt (i.e. mortgages). I wouldn’t make extra payments, I’d tuck that all into your taxable account. That’s what I do anyway. You can always access that money in case of emergency (as you could with a home equity loan if need be).
Just my approach…hope that helps!
I don’t have a choice. 9% is a required contribution. But I definitely feel like we could do more with our taxable than what we are currently doing!
I’m with The Green Swan on the pension and Roths – I would try to figure out the pension (if you can, sounds like it could be a challenge) and continue to get the tax benefit out of the IRA contributions.
I tend to waiver on the debt vs. investing puzzle. As much as I despise our mortgage, right now, I’m going with the economics of the equation and investing the extra money, rather than paying down the mortgage. But I struggle with this exact issue on a weekly basis. It all comes down to what you are most comfortable with – what will bring you the most peace of mind.
There’s nothing to figure out on my end regarding our pensions. Everyone in my district has to make a set contribution that is 9.4% of our pre-tax salary.
What I could do is figure out our 403(b) plan a bit more aggressively. Our options are so limited, and the fees are so high, I just keep giving myself a free pass. Which is a terrible idea.
We chose the opposite approach! We’re contributing to both Roth IRAs and 401(k)s, but debt is our #1 priority. We pump most of our money into our student loan payments and we’ll continue to do that for the next year. We figure that the interest rates on our debts cancel out any possible dividends from investing, so we want to tackle those first. It’ll be easier for us to invest if we have zero debt payments each month. 🙂
My mortgage is definitely my priority. It looks like my pension is, but that’s just because it’s required. 😉
When Mrs. SSC started her teaching gig she opted out of the TX pension because it was a “guaranteed 2% return” or something small like that. But it was a one time offer – you can’t opt back in once you opt out. We’re fine with that and just use that money to invest in Vanguard.
As far as the Roth, yep keep plowing funds into that every year.
I’m fine with debt, especially if it’s low rate debt like mortgage rate or my student loans. I got them locked in at 2.25% for the whole loan so iw asn’t worried about paying it off early because it was almost no interest. I looked at it as I can make more than that in the market, so why not put more money there first?
Mrs. SSC just didn’t want that debt around so we killed it and then put that extra in the market as well. It’s all about what you’re comfortable with though. If you’re more comfortable paying off your house first and then investing in taxable accounts, go for it. If you want to go halvsies and pay 1.5 mortgage and put the other half in the market, maybe that’s a good compromise too. In the end, what makes you sleep better at night, is the route you should choose for your investments.
We can’t currently opt out, but “Right to Work” is being pushed pretty hard. I would never opt out entirely. If our unions get any weaker, the governor will absolutely wreck our jobs. It would be nice to have more control of my pension (and more faith in the system), but with how outspoken he is about his feelings towards public school teachers, I think the pros outweigh the cons. Our state is bananas.
Your pension sounds scary…I can seem why you’re nervous about it. Up here in Canada our pension plans seems much less scary! We have defined contribution plans where the employee and employer both contribute a set amount and you get to choose your investment (usually from a set list of funds) and in retirement you can transfer the full account to your own institution. The other is defined benefit where you pay into the plan and receive a set amount of monthly income in retirement based on service/income/etc. These are usually gov’t plans or large corporations and while the investments are run for you there isn’t much fear of the plan losing funding (at least in the majority of cases).
As for debt vs. investing…I think I’m right in the middle. I hate debt but haven’t been too concerned with paying off our mortgage super fast because our interest rate is really low and my investments have been performing at a much better rate. Putting money away for retirement now also means it has more time to compound.
Sarah, just a word to the the wise, although the Canadian govt seems to value public servants a little more than we do, no country, state, or city is immune to having their public pensions/contribution plans renegotiated. I would definitely hesitate to put all my eggs in this basket!
Oh, I completely agree and right here at home there has been a lot of talk of our provincial government changing their pension plan…but luckily it would only impact service going forward.
Definitely having an alternate source of retirement income outside of a pension gives you more safety and and flexibility.
I’m with the other commenters. I know nothing about pensions, but a 9% contribution into a black hole would scare the crap out of me in any state, let alone one with financial issues. I’ve seen pensions work out well (like for my late grandfather, who had a military pension and a CalPERS pension support him for decades in retirement), but I worry that those will be the stories of that generation, not ours. There’s no way to opt out at this point? I would want to learn more before I did that, of course, but I’d at least want to know my options.
Here’s the thing about debt vs. investing: both choices are just fine. I’d do whatever you’re more comfortable with. Paying down your mortgage is a guaranteed return every time, and if it helps you sleep better at night, great. Stock valuations are high right now, after all. On the other hand, mortgages provide good insurance against inflation, and the average returns of the market are probably quite a bit higher than your interest rate. Also a sound decision, if you’re comfortable with it. No wrong answers here — both are very responsible choices!
That’s a perfect perspective, Matt. It *is* a black hole. It’s working out well for current retirees, but it feels a lot like Social Security. I’m not convinced there will be anything left.
Given the choice, I would not opt out only because that is exactly what our wonderful politicians are hoping for with Right to Work. If unions leave public schools in Illinois, they will absolutely be run through the mud. And not just from the teaching perspective. It’s definitely a bitter pill to swallow.
I know that a mortgage is debt, but I am not positive about paying extra on ours. First, it is less than we were paying renting. Second, someone else pays it for us (the airbnb guests.) Third, it will stay the same (except for whatever rise in property taxes we see) for next next 28 years. The money that we could spend on extra mortgage payments probably will have a better rate of return spent on an additional rental property or even in the market.
That being said, psychologically, I understand wanting debt to just be gone.
It looks like you have no choice with the pension which is a whackadoodle situation.
Are there solutions where you can both pay down the mortgage and take advantage of compounding with a taxable savings account? With paying double payments to the mortgage, how long will it be until it’s paid off? Would you spend less in interest if you refinanced to a 10 or 15 year loan? (Because I know that’s what you want to do right now, in addition to Baby and grad school)
You have a lot of options and it’s up to you to figure out what you’re comfortable with. To me it sounds like stability for your family may be more important than having a huge pile of cash some time in the future-which isn’t to say that both can’t happen, just that right now one is more pressing.
This is so much good advice to consider, Jax! If I were in your shoes, I don’t think I’d fuss over my mortgage either. I do think we need to come up with a system where we start committing more to our taxable. The baby step is probably going to be to stockpile the cash in our “high yield” (a whopping 1%!) savings. Once Baby is here and things go smoothly, then we can start to move money into the riskier account.
Now to put the plan into action!
I’m with you on the mortgage. I hate debt and I want it gone. We prioritize our 401k’s and our mortgage. When the mortgage is eventually gone, we’ll ramp up our taxable investments. While I get the argument that taxable investments can potentially drive more growth, the housing and dot.com bubbles keep me skeptical.
And investing is such a mind game, right? For me, it motivates me to see my debt drop. And I know I’m saving that interest. I’m glad I’m not alone, Sherikr.
Another way to look at it is this: what happens if things change and your earning level drops?
As long as you have a fixed-rate mortgage, your payment’s not going to change that much. A little for property tax and other escrow account stuff, but mostly it will stay the same. If you invest more and pay off slower, you have the earnings on the taxable account to continue to make payments, at least for a while. Or you can take out the Roth contributions, if needed.
If you get the mortgage paid off but don’t have the investments? You could sell the property, I suppose, but you’ll still need to have a place to live. Or take a home equity loan? I just think the options aren’t as good.
I just think that the investments give you more ways to confront risk in the future, as long as you’re locked in to a low rate mortgage. (If it’s an adjustable rate mortgage, get that sucker paid off.)
It’s not an adjustable rate mortgage. No thanks! 🙂 And we don’t even escrow. So I should probably shut up about how awful my mortgage is 😉 You’re right that investing probably opens us up to better options. I just can’t shake the feeling that it opens us up to more risk, though, too.
I am aggressively paying down my mortgage but only after exhausting my tax advantaged options. In the end, each year has a limited amount of funds that can sheltered because of the governmental limits so once that opportunity has passed, it’s gone. After I have done that I am happy to pay, pay, pay down that mortgage debt. In my case, the options I max out are the 401k, IRA and HSA. It’s about opportunity.
My second thought is that while paying off the mortgage has a huge payoff, freeing up that monthly bill, it is a payoff that comes all at once. You cannot really receive the effects incrementally. You either are paying it, or you are not, so it takes a long time for you to be able to receive the reward of that effort. The ‘loss’ of money without a benefit that you can tap into when you need it can be difficult.
I too am wondering if the pension I should receive will be there when I retire. Still sounds too good to be true. I have been working on side hustles to create a little extra investment money. Savings is coming through mine and the Mr’s employer, plus any extra we can stash away. My side hustles have been consistently over $100 each month. I am increasing my goal this month, lets hope I hit it. Great article thanks for sharing.
That’s awesome that you’ve been able to do so much with your side hustles, Julie!
I created a framework called: FS-DAIR.
Essentially, I use the debt interest rate as a percentage of how much disposable income I use to slay my debt e.g. 3% interest rate, 30% to debt, 70% to investing.
It is a logical plan! The framework is linked in the website field below.
Sam