True, Sly, but you are assuming that a person could actually pay off his/her mortgage with the emergency fund. My fund isn’t a higher amount than my mortgage. If it were, I would go that route and start building up my fund again with the money I would save from no mortgage payments. I doubt that many people have an emergency fund with more money than their mortgage debt.
Hmmm…Warren beat me to it, but yeah, I agree.
Incidentally, what would you do if you had 100k sitting around? It’s not like a million dollars, where you could try to find a way to stop working. But it’s certainly more money than most people would have sitting in the bank. In fact, I bet most people average less than $5k in their bank accounts, and not because all their other money is tied up in investments and such. It’s just hard for most people to save large amounts of money.
Okay, I think I see where the disconnect is. My emergency fund is usually between $3000-10,000, and also gets used for periodic, non-emergency expenses like car insurance and vacations. The rest of my money is invested more aggressively.
You’re right, $100,000 is a long way from “fuck you” money. I’d even go so far as to say that a sudden $100K windfall wouldn’t change my life at all. I’d probably spend a little bit, like maybe get a new TV or a lens for my camera, and divide the rest up more-or less evenly between retirement savings, long-term taxable savings and house/car fund. And aside from totally blowing the curve on my net worth graph, it wouldn’t really affect me at all.
Ok, then I understand (and agree). Completely agree that paying off a portion of your mortgage and leaving yourself no money or emergency fund is not a good idea.
I actually do happen to have this problem right now. Admittedly, my mortgage is considerably lower (after approximately 12 years of payments, including some additional payments) so it is nowhere near 80% of home value (hence the home equity line I discussed earlier).
Basically, I saved up money over a couple of years for a down payment on a larger home. Fortunately, I did not make the decision to buy a larger home at that time (because I would have been making that decision roughly 2-3 years ago, and as we know that would have turned out poorly). But now I have a substantial sum ($150k) that has been bouncing from things like an Orange Account to some Vanguard lower-risk stuff (currently have a fair bit of cash in Vanguard GNMA Fund Investor Shares).
I previously kept the cash substantially liquid because I thought for awhile that I might buy a new home at a suppressed price in the down market, and I wanted to keep the cash dry and intact for a down payment if needed. I have pretty much decided not to buy at this point, and I’m tired of having a lot of cash sitting around earning next to nothing. That amount of cash also pretty much matches the amount that is remaining on my current mortgage.
So I am now strongly considering just wiping out my existing mortgage, because I frankly have little better to do with the cash, and I like the idea of being absolutely debt free (while owning my home outright). I don’t want to invest the cash in higher risk stocks, etc., because I’m not a personality type that wants to see any material risk of my seed money getting eaten while I still have debt outstanding.
Yep. In fact, there is a good article on this. HENRYs. I empathize with the notion that you can have or make on an annual basis what seems to be a large amount of money, but still be nowhere near having enough money to truly walk away and live independently without working. Not on a “woe is me” sort of basis (I think some of these people should think a bit harder about whining about how they don’t have tons of money left after paying for private school tuition for three kids, etc.). But it is true that you kind of need to make staggering amounts of money to get to that point of true wealth (at least to get to it in your 30s and 40s).
Part of that is probably because I’m in Canada. A big part of American emergency fund projections are based on loss of income or unexpected medical expenses, which I don’t have to worry about. If I were self-employed, I’d probably keep $10,000 in cash and another $20,000 in rolling six month GICs.
So I am now strongly considering just wiping out my existing mortgage, because I frankly have little better to do with the cash, and I like the idea of being absolutely debt free (while owning my home outright)
Do it. I was in that situation about a year ago (before we upgraded house) and it’s an amazing place to be. No debt and a paid for house … ahhh…
Heh, that reminds me of when I was in highschool and saw an article about a woman complaining how hard it was for her as a single mom raising her daughter on $60,000 a year. Meanwhile my mom was raising two kids on less than $35,000 a year. I didn’t have a lot of sympathy then, and I don’t now.
The thing that strikes me immediately about the guy in that story is that it is so obvious why he’s “not rich yet”. Private school. A five-bedroom house in the nicest neighbourhood. You can either have the money or you can have the lifestyle, you can’t have both. This is how lottery winners and NBA players end up bankrupt. No matter how much you earn, you can always spend more. And my offer to anyone complaining about paying too much tax to subsidize poor people is they can trade, at any time. If they really hate paying $100,000 in taxes so much, quit the job at Morgan Stanley and find a job that keeps you below the poverty line.
My goal is to be one of the people who is actually rich but nobody knows is (the so-called millionaire next door), and not the people who have an expensive house and a flashy car and nothing in the bank.
The tax deduction makes it more complicated, but even at a 33% top marginal rate and assuming that you had enough other deductions to warrant itemizing, it’d still be like a 3% guaranteed after tax return. With a 25% top rate and no other deductions, it’d still be close to 4% maybe.
I find that people really overestimate the value of the mortgage interest deduction.
Build the right portfolio balanced to what your risk tolerance is.
I would say a heavily bond based portfolio (30% VCSH, 20% LQD, 20%TIP, 20%JNK, 10% RSP) would give you a fine return. It has 10% stock exposure and the bonds are spread between long and short term. If rates go up (unlikely) there will be some adjustment in LQD and JNK, but the payments will continue and the cap loss will be offset by the gain in RSP.
That’s what I’d do with an emergency fund, only adjusting the allocations based on risk appetite.
I cant stand the slow growth low risk funds. It seems like its to to little return for what ends up still being a significant risk. I just sit cash in my etrade account and buy into short term stocks i think are going to move. I started with 7k of money (my own personal line for how much I can afford to lose) and its at about 22k right now after 2 years. I bought into the Tesla IPO, and just like having the cash on hand to put into things like that that seem fairly surefire (at least compared to everything else). And its kind of fun.
There is definitely none, and certainly wasn’t what I was saying. What I said was that I like to buy into fairly surefire short term stocks (like Tesla), and that it has worked out fairly well for me (not that I haven’t had bad days).
I wouldn’t be willing to do this with real money (which is why I only started with what I was willing to lose) and most of the time I don’t have the money invested in anything. It just seems easier (to me) to let the money sit ready for investment and jump in for good opportunities when they are available than just sit and get 2% a year.
Investing in pretty much anything in the past 2 years (present quarter not included) would have produced a similar yield. Especially if you had started towards the end of 2008.
I was going to suggest VBLTX, which took much less of a hit during the 2008-2009 down turn. I thankfully had my Future-House-Down-payment monies in there when the market crashed.
I have since renamed it my Buy-Papa-an-Ariel-Atom fund, but I still keep the cash that I need on hand in there.
