Saturday, March 20, 2010

To Be Or Not To Be Debt Free?

The New York Times has a good overview of when to prepay on a mortgage and when not to.

Basically if you've got a good mortgage rate, like we do at 4.78% fixed, the NYT advises that you should not be throwing extra cash at your mortgage if: (1) you have other higher interest debt (i.e. credit cards); (2) you are not investing enough in your 401k to get the employer match*; (3) you don't already have a good size emergency fund saved up.

I agree, generally good advice, our only debt is mortgage debt (although we've got more than one mortgage with our investment properties), we are maxing out our 401ks and we have a $30,000 emergency fund. So we have got the green light, according to this advice, to pay extra on our mortgage.

The NYT article also runs through the tax benefits of a mortgage (although I'm not in fan of debt for tax benefits), better returns elsewhere (i.e. investments) and the general need most people have for liquidity these days.

I'm always a little skeptical of not paying off debt to get a better return in the market, but I would assume that an individual who is disciplined enough to pay down a mortgage is also disciplined enough to invest or save that money rather than spending it. I also agree that msot people these days are in need of greater liquidity due to the general economic uncertainty facing many.

*I always find it interesting that almost all personal finance articles, advice, blogs, etc. assume that all employers provide a 401k match. I've never worked for a company that provides a match. I also don't agree that one should only invest in a 401k if one receives a match, invest in a 401k so you can take care of yourself in retirement.

1 comment:

Anonymous said...

I think the point about 401Ks is that it would be foolish not to contribute to one if there IS a company match - that's like a guaranteed return. If you don't have a company match, a 401K may not be the best place for your retirement savings, since all withdrawals will be taxed as ordinary income (instead of the often lower rate for many types of investment income). Of course everybody should be investing for retirement, the only question is in what type of account.