patrick.net

Put 40k in your retirement account. If your house is worth enough and you plan on living there indefinitely, 100k remodel is not a bad investment. Put the other 60k toward the mortgage on your primary home and pay it off before even considering a second home. I have known people who have done the "Hawaii thing", never went much or seldom, rentals didn't work out that well as absentee landlords, sold them at a loss.

Cars? Fogeddaboudit. I have done the luxury car thing, they are narcissistic depreciating assets and will all be yesterday's junk in a few years. I am happy to drive beaters and good economy cars, and I can afford just about any car I want without financial compromise. Cars are appliances.

3. Pick 3. New car is a huge waste of money.

4. Hookers and blow.

depends on your age...

alpo says

any ideas?

Donate to Patrick.net

alpo says

I have around 400K of total savings (besides 401k) and a house that is 70% paid off. I am trying to figure out if i should spend $200K of my savings:

You are giving the bank $400K at 0% interest, and borrowing it back for the mortgage at 4%. It's a bad deal. First pay off the mortgage.
1. Pay off the mortgage.
2. Do some home improvements.
3. Invest in stocks.
4. Buy a Prius.

If you feel like you have more money than you need to retire, or on the path for the 2.5M or so some money article put out recently.

I would just raise my lifestyle from say 5K a month to 7K a month instead of decision 1, 2, 3 and 4. It's more sustained as the excitement of a new X5 lasts 18 days. A lot of retirement stuff focuses on having money when you are old and frail. it is at the expense of your young years. Have a proper balance and spend some money before you are too old to use it. Why wait to buy a second home in Hawaii when you have wrinkles, just find time and go NOW. Hawaii is not all that great when you are 70

1) pay off mortgage.
2) research small businesses and find a winning model. Find a young person you can trust and set them to work on the business angle using seed money from savings.
A guy I know did this over and over, starting and selling businesses once they got going. He's a millionaire now. They key was to use a person to manage the enterprise that you can trust absolutely and is good with people. For him that was my dad, who ended up buying one of the businesses from him and keeping it.
Good people make you money. Great people make you wealthy.

1. pay off the house. that's a guaranteed 4% return in interest you won't pay
2. but keep a buffer of at least a year of living expenses
3. invest in 0.1% overhead vanguard index funds, preferably in a self-controlled retirement account
4. this isn't such bad advice:

Vicente says

4. Hookers and blow.

life is short. make sure you enjoy at least some of it.

pay off the house. that's a guaranteed 4% return in interest you won't pay

I don't really disagree, but really you should weigh the cost of the money (interest rate - any tax savings) vs. your expected return on investments. Historically stocks beat 4%, but there's a reason they have that disclaimer about past performance not guaranteeing future returns..

tatupu70 says

pay off the house. that's a guaranteed 4% return in interest you won't pay

I don't really disagree, but really you should weigh the cost of the money (interest rate - any tax savings) vs. your expected return on investments. Historically stocks beat 4%, but there's a reason they have that disclaimer about past performance not guaranteeing future returns..

Alpo states that his LTV is 30%. The odds are he does not get much of a tax write off from the mortgage interest as the standard deduction on taxes is $12,000 anyway.
If that is the case, that 4% return he gave himself is as good as tax free.

You pay off your primary residence on basic prudence. Don't use your home as leverage for a gambling addiction, pay it off and know you have the security of owning a home no matter what else happens. Who cares what the relative interest rates or market shavings are.

Strategist says

Alpo states that his LTV is 30%. The odds are he does not get much of a tax write off from the mortgage interest as the standard deduction on taxes is $12,000 anyway.

If that is the case, that 4% return he gave himself is as good as tax free.

You could be right, but I wouldn't say the odds are such. He obviously makes pretty good money and may have an expensive house. Don't forget you get to deduct state and property taxes as well, so all of the interest may be deductible.

Ceffer says

You pay off your primary residence on basic prudence. Don't use your home as leverage for a gambling addiction, pay it off and know you have the security of owning a home no matter what else happens. Who cares what the relative interest rates or market shavings are.

Everyone should care. You can choose to pay off the house arguing that peace of mind is worth more than the expected gain from investing, and I won't argue with you. But, others may prefer to make more $$. I don't think there's necessarily a right answer.

What makes you think you will make more $$? If you use your house money on a hunch, a hot tip, or believing you can predict the outcome of markets, you have already lost. So then, you have lost money plus your peace of mind. Seen it happen over and over again. That's why it's called gambling.

Ceffer says

What makes you think you will make more $$? If you use your house money on a hunch, a hot tip, or believing you can predict the outcome of markets, you have already lost. So then, you have lost money plus your peace of mind. Seen it happen over and over again. That's why it's called gambling.

Hey--I'm not arguing I will or won't. But, looking at the historical returns of the stock market over ~100 years, it beats 4%. So, you don't have to gamble on a hunch or predict the outcome of anything. Just putting it in a Vanguard index fund should beat 4%.

The other side is that if you happen to time the market incorrectly, you could go 20 years and not break even.

3. invest in 0.1% overhead vanguard index funds, preferably in a self-controller retirement account

Vanguard was the biggest winner last year as far as inflows with many active managers seeing outflows. I wonder if the market is getting dumber and dumber since everyone is just using etfs and index funds (myself included).

tr6 says

3. invest in 0.1% overhead vanguard index funds, preferably in a self-controller retirement account

Vanguard was the biggest winner last year as far as inflows with many active managers seeing outflows. I wonder if the market is getting dumber and dumber since everyone is just using etfs and index funds (myself included).

Or the public are getting wiser, and realize money managers can't do shit.

Buy one share of Berkshire Hathaway and invest the balance in Fidelity Select Biotech

Call it Crazy says

That's what I did when I bought a year or so ago. Instead of putting a big chunk of cash down on the house and taking a lot smaller mortgage, since I got a sub 4% mortgage rate and knew home values were going to drop in this area, I chose not to put money into a depreciating asset

That's completely the wrong analysis, but I'd expect nothing less. Whether the house is appreciating or depreciating doesn't really come in to play. You're either paying down the loan to avoid the interest payments and earning 4% or you're investing the money to try to beat 4%. Whether the house gains or loses in value is not relevant.

Unless you're planning on defaulting, I guess.

Strategist says

Or the public are getting wiser, and realize money managers can't do shit.

If everyone only used index funds then all stocks should go up and down by the same percentage frozen in time.. Money managers and active investors are necessary long term. The less of them out there right now, the more companies can get away with stupid ideas.

Call it Crazy says

Oops, I gave you credit too early....

It makes a BIG difference if the house is appreciating or depreciating and is very relevant. Lets say you had $200K sitting around. Would you take it and pay all cash ($200K) for a house and not take a mortgage knowing that home values were dropping and that house will be worth $175K in a few years?

Or, would you take $20K, buy the house with a sub 4% mortgage rate, and take the other $180K and invest it in a fund returning over 10% if the house will be valued at $175K in a few years..

Unless you're going to default on the house, it makes no difference.

If you know you can earn 10%, you never pay all cash and always take out the mortgage. It doesn't matter whether the house appreciates or depreciates. It's always the right move. You're basically earning 6% on the bank's money

(edit: If I knew a house was going to be worth 25K less a few years later, I wouldn't buy it in the first place)

Call it Crazy says

Make up your mind, which will it be??

Most people don't buy a house planning to default on it, so I'd say it doesn't matter

Call it Crazy says

Wait, didn't you just say it makes no difference??

It doesn't make a difference, you take out the loan whether the house will rise or fall in value. That's the definition of "not making a difference". What don't you understand?

Call it Crazy says

You had to come back and edit your post after you figured it out??

Just thought I'd try to make it more clear for you. Looks like it was a futile effort.

For one, don't waste money on luxury cars. If you get the urge, rent one, once in a while for a joy ride. Simply buy a 2 year old Civic, from let's say Hertz at $1K less than the blue book value, and get the additional warranty, so that you don't have to worry about the engine, axle, or transmission for another decade. Most likely, as long as you get the CV joint, alternator, timing and other belts, and pads changed, you're good for another decade. Those cars last for a long time.

If you're not an active trader/investor, put some of it, perhaps a quarter, into a fixed S&P500 tracker annuity. Sure, there's a maintenance fee, however, you'll never get your principal knocked down, during a major market correction. Your principal is safe (and many states insure those products up to $100K of the principal). In fact, back in '08, a number of insurance providers actually wanted to return the investment value some of their fixed annuity trackers, because they were getting creamed during the market sell off, and couldn't make any money.

If you want to be a passive investor, but want some assurance of not completely losing your shirt, stick to the usual dividend suspects like tobacco, utilities, alcohol, food stuffs, and automatically re-invest those dividends (DRIPs). That pile will grow over time. And what happens during years like '08, is that since the overall market goes down, the actual dividend percentage spikes up. I've even seen up to 12-20% dividends at the bottom, because the prices were so hammered but those industries earn enough to not have to cut the same payout as prior quarters. Basically during those troughs, you'll be buying up 2-3x the number of shares at the bottom. When the market re-coops, you're now own much more of those businesses than before. Nobody goes broke, betting on ppl's smoking addiction.

Only buy cap gain stocks, if you're an active trader. Otherwise, stay away, the average person, who's not always studying charts, reading financial statements, and so forth, will usually jump in at the wrong time and find themselves in a hole if another 2008 were to hit again.

Call it Crazy says

Who said anything about defaulting? You made the statement that it doesn't matter if the house rises or falls in value

lol--you don't even know what the hell you are talking about anymore.

Call it Crazy says

Once again, if you knew how to use a calculator, you would see it makes a big difference in the ROI which way the house value goes, specially if it goes down in value and if you take a mortgage or pay cash.

But I wouldn't expect you to know basic math...

I give up. Of course it makes a difference in ROI. It doesn't make a difference in the decision whether to pay cash or take out a mortgage. I'd lay out each scenario for you, but it will clearly be a waste of my time because you cannot comprehend it.

Call it Crazy says

Feel free to run the scenarios and check back with us!

Given: Mortgage rate of 4% and Investment return of 10%/year

Scenario 1: Purchase house at $200K all cash, worth $175K in three years. Lost $25K.
Scenario 2: Purchase house at $200K with mortgage (20% down), worth $175K in three years. Lost $25K on house, made $53K on investment = $28K gain.

So, if house depreciates, it's better to take mortgage.

Scenario 3: Purchase house at $200K all cash, worth $225 in three years. Gained $25K
Scenario 4: Purchase house at $200K with mortgage (20% down), worth $225K in three years. Gained $25K on house, made $53K on investment = $78K total gain.

So, if house appreciates, it's better to take mortgage.

Regardless of whether house rises or falls, it pays to take the mortgage if you know you can make 10% on your investment, like I said.

So with regards to investments and mutual funds in particular, I second Patrick's advice. Compare the performance of indexed funds to equity funds that you may own, or are thinking of buying. If the equity funds do not outperform the indexed equity funds, you would be losing money to buy the equity funds due to the higher management fees.

alpo says

what should I do with $200K

One really good hooker, 200 decent hookers, or 100,000 of the hookers that CIC visits.

tatupu70 says

Better to take mortgage.

So, regardless of whether house rises or falls, it pays to take the mortgage if you know you can make 10% on your investment, like I said.

The benefit of getting a home with a mortgage is the tax benefits and high ROI you get with the leverage. Otherwise, investing in the stock market is the clear winner over time.

Dan8267 says

alpo says

what should I do with $200K

One really good hooker,

That's a wife. Very very expensive if you dump her.

Pay off the house. Drive the car until the wheels fall off.

My ride: 2001 Honda Civic HX with 201K miles. I figure it's good for at least another 200K miles.

Call it Crazy says

So, was my analysis wrong after running the numbers??

Of course it was. Because, like I said--it makes no difference if the house goes up in value or down in value. It only matters whether your investment return is greater than the mortgage rate. Which is what I said and you, for some reason, disagreed with.

Here is another way of looking at it. I don't know how many years are left on the mortgage, but let's assume 9 (a WAG, i.e., a 30 year that is 70% paid off.). If you paid off your mortgage with cash that was sitting in a bank account, earning just about zippo, and let's say your mortgage rate was 4%, you'd have a risk free, stable return of 4% over the nine year period. That is much better than what you would get in a risk free 10 year Treasury. So a sure 4% risk-free return, that's not bad. What other folks are pointing out is the opportunity cost. You are getting a 4% return versus a higher return. But if anybody can steer me in the direction of a risk-free 10% return investment, I'm there.

Blurtman says

But if anybody can steer me in the direction of a risk-free 10% return investment, I'm there.

Not even in Mars.

alpo says

I have around 400K of total savings (besides 401k) and a house that is 70% paid off. I am trying to figure out if i should spend $200K of my savings:

1. leave it in savings and continue to live poor now and driving my 10 year old honda civic with lot of body damage inflicted by other people.

2. buy 2015 BMW X5 for $60K + remodel home for $100K and put the rest ($40K) in retirement account?

3. live poor and continue driving beat up honda civic, but use $200K as downpayment for a second home in hawaii - my long term goal is to own two homes fully paid off - live in one and rent out the other for spending money.

4. something else...

any ideas?

I don't believe this is a real post. Anyone capable of putting 400k (other than inheriting it recently) in the bank is smart enough to get a decent return on it not let it sit around in savings or cd's.

I disagree with paying off the house. Is it 70% of the principle or 70% of the payments? Either way mortgages are heavily front end loaded. You've paid most of the interest already. Getting to 70% either way means most of the payment is principal with the principal portion increasing every month. You certainly won't be saving 4% or anything close to that at this point.

put aside $12k to max your Clash of Clans account.

best investment anyone could ever make.

bob2356 says

Either way mortgages are heavily front end loaded

Do you know what that means? It means that when the mortgage principal balance is 300K, you pay the interest on 300K. When the balance is 100K, you pay the interest on 100K. Front loaded is a stupid term. You still pay the same interest, it's just over time you've reduced your principal so more of your payment goes to reducing principal even more.

life is short. make sure you enjoy at least some of it.

Yeah. Hopefully I will figure out how much of life I can or should enjoy before I go old and frail.

Strategist says

Alpo states that his LTV is 30%. The odds are he does not get much of a tax write off from the mortgage interest as the standard deduction on taxes is $12,000 anyway.
If that is the case, that 4% return he gave himself is as good as tax free.

Mortgage interest tax break was good initially, but now it is pretty much gone. Plus we regularly hit AMT even with the mortgage interest, state, and property tax deduction, so I am not sure how much of a tax break I am actually getting. I am pretty much phased out of all the common deductions (like IRA deduction, etc).

Ceffer says

You pay off your primary residence on basic prudence. Don't use your home as leverage for a gambling addiction, pay it off and know you have the security of owning a home no matter what else happens.

We bought the house in 2009 after the financial crash. It was originally listed at 1.35M and we bid it down into short sale as the financial crisis unfolded. Waited for several months for short sale to close, still no other buyer and we finally got it for $1M. Since then we have paid off 700K (including 200K downpayment). Just refinanced the remaining 300K into a 3.25% 15 year mortgage. Monthly mortgage is now 2200, well below its rental price. But no where to go if we rent the house. A 2bed 2bath apartment here in silicon valley rents for at least 2800 if not more. Maybe I should use the $600 per month that I am saving over a 2bed 2bath apartment to finance the BMW :-)

Another way I figure it is that is that I will have to pay around $80K interest over 15 years on my current mortgage. If I can cut that into half, it means I get 40K of free money towards buying a BMW X5 (the other 20K I can manage). Otherwise all my other investments will have to make around $120K to offset the mortgage interest and pay 40K towards a BMW X5. Thats a bit too complicated to make sense for me, so paying down mortgage is easier.

A friend lost $80K of his wife's savings in stock market a couple of years back and obviously the wife is pissed off. I reminded myself not to do stocks. Better of paying down mortgage by 80K. But, yes, I am thinking about gradually putting some money in index funds.

tatupu70 says

He obviously makes pretty good money and may have an expensive house.

Wife and I both have decent jobs in tech sector. Here in Silicon Valley that pretty much means 350K a year with some experience. My wife grew up middle class and I grew up lower middle class plus had to pretty much fend for myself in college. Money is good, but I don't feel rich. Wife splurges every once in a while, but I am still not used to either having money or spending money.

Beyond that there is job uncertainty. My wife is getting increasingly insecure about her job and her ability to find another good job. I have been laid of three times and last time I was out of job for around five months. So job uncertainty has to factor into any financial decisions we make. But I am starting to get to a point where I feel we have some options with money - sort of at an inflection point where if things go as they have been going, we will start building some wealth. The house is expensive $1M cost and apprised at around $1.5M during last refinancing, but its no palace. Just a simple 3bed 2bath rancher on around 7000 sqft lot. Most of our money over last few years has been going into paying off the house.

Other than that, next time there is a major bust in either stock or real-estate market (and definitely there will be one sooner or later), I am definitely going in :-)

You seem stuck on the idea of that car. My experience with expensive cars was it felt interesting and prestigious for about a month or so, then I was just the same asshole in an expensive car and neither me or anybody else really cared anymore, the car was just a car.

Like Rin said, if you want the "car experience", go rent a fancy car for a week or two once in a while and keep your old standard car for regular use.

You'll also be able to try different cars for the day when the money really doesn't matter.

Ceffer says

You seem stuck on the idea of that car. My experience with expensive cars was it felt interesting and prestigious for about a month or so, then I was just the same asshole in an expensive car and neither me or anybody else really cared anymore, the car was just a car.

He's not talking about getting an Aston Martin...

Bigsby says

He's not talking about getting an Aston Martin...

Ceffer says

Like Rin said, if you want the "car experience", go rent a fancy car for a week or two once in a while and keep your old standard car for regular use.

Ppl, a car serves one purpose, getting from point A to point B. And that's about it. Everything else is a vanity thing, the Toyota Corolla achieves the same goal as a Lexus, minus bragging rights.

Thus, I spend my cash on international esc*rts, because that's a real experience of feeling some t*ts and *ss without the lie of a so-called relationship.