Doing DR babysteps differently? - Mothering Forums

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Old 07-26-2009, 01:05 PM - Thread Starter
 
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The thing I don't get, is that mortgages consume sooo much of your money in interest, so wouldn't it make sense to pay it off as fast as possible after you have your EF? And then when it's paid off you have a huge chunk of money to start retirment/college plans? Thoughts?

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Old 07-26-2009, 01:20 PM
 
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Once you get your fully funded emergency fund of 3-6 months then you start retirement, college savings and paying down the mortgage all at one time (well do 15% in retirement first, then college savings and then more on the house). Usually once you up retirement to 15% and start college funding you won't have a ton to throw on the mortgage but you want to start retirement and college savings ASAP because the more time you have for compound interest the better. Remember with no debt and your investments going once you house is paid off you will be doing really great in retirement. Playing around with a retirement calculator and waiting 10 years really throws things off. Although if you have a tiny mortgage and can pay it off in a year or two I am sure he would say go for it but most of us it would take 10 years or so to pay off a mortage even with gazelle intensity and that is too long to be out of retirement.

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Old 07-26-2009, 01:42 PM
 
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What the PP said plus you can deduct your interest on your mortage from your taxes. It's still not going to offset that cost entirely, but unless you can pay off the mortage fast, it's no wise to wait on savings goals. You can always become a renter in retirement age, but you can not take a loan out to fund your retirement.
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Old 07-26-2009, 02:27 PM
 
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Based on our low risk tolerance (and correspondingly conservative investments), the interest rates involved, and a few other factors (tax rates, DH's employer no longer doing a 401k match, etc), we have chosen to modify our financial plan from DR's.

We used to max out our retirement and save for the kids college, but about 18 months ago started throwing everything toward our mortgage instead. We have no other debt. The mortgage should be paid off in 5-7 years if I stay at SAHM and even quicker if I WOH.

Compound interest works both ways, and although our fixed mortgage rate is low it isn't nothing. The bottom line for us has been that "investing" in paying off our mortgage has net us more than it would have invested in retirement.

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Old 07-26-2009, 03:07 PM
 
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i'm doing DR steps differently too.

we will not be debt free for about 5 years.
i cannot go 5 years with just $1000 in savings.
i've got to have more of a safety net than that.
so i'm doing step 2 and 3 simultaneously.
things are so unexpected, and while its unlikely that DHs job would be one to disappear (he's the ONLY night shift nurse where he works) you still never know.
when we do have a fully funded EF, it will be 2 years worth of expenses.

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Old 07-26-2009, 03:48 PM
 
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Compound interest works both ways, and although our fixed mortgage rate is low it isn't nothing. The bottom line for us has been that "investing" in paying off our mortgage has net us more than it would have invested in retirement.
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What the PP said plus you can deduct your interest on your mortage from your taxes. It's still not going to offset that cost entirely, but unless you can pay off the mortage fast, it's no wise to wait on savings goals.
Mortgage interest can't be deducted in Canada.




I like the Dave Ramsay thread for motivation, but I am NOT doing the steps in order, lol.

We have an emergency fund larger than the baby e-fund he recommends, but less than the fully-funded one.

Our mortgage actually has the highest interest rate of all of our debts. And our mortgage has limits on how much you can pay extra on it each year. So our plan is to pay the max amount on the mortgage, and throw any extras beyond that to the smaller (and lower interest) debts we have. Once those smaller debts are gone, we will continue paying max on mortgage, and then extra will go to retirement.

Because of what SeekingJoy posted above, we should come out ahead in the end. Besides that though, DH has a defined benefit pension plan at work, and we are still fairly young.

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Old 07-26-2009, 04:09 PM
 
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I don't do them in order either. I don't feel "safe" with just the $1000 emergency fund, so I am keeping quite a bit more than that in savings instead of throwing all of my savings at my car loan, even though our savings would pay 30% of our car loan off.

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Old 07-27-2009, 04:00 AM
 
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I don't think I'd necessarily pay my mortgage off in lieu of putting money in savings or college, but I'd definitely pay off extra along with those other things (if it could be afforded).

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Compound interest works both ways, and although our fixed mortgage rate is low it isn't nothing. The bottom line for us has been that "investing" in paying off our mortgage has net us more than it would have invested in retirement.
This is a really good point. One of our mortgages is at 6%, which is much higher than any savings rates you'll get, so you have to take that into account.

I think DR is excellent but everyone's situations are different so while I've looked the program over, we've made changes that I feel are better for us.
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Old 07-27-2009, 04:17 PM
 
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Originally Posted by lovebeingamomma View Post
The thing I don't get, is that mortgages consume sooo much of your money in interest, so wouldn't it make sense to pay it off as fast as possible after you have your EF?
It depends on rates.

If you have $1500 per month to put into extra mortgage principal payments and retirement/college and the mortgage is at 5% while the retirement/college investments are earning 3% then you should pay all of the $1500 into the mortgage. If the investments are earning 6% while the mortgage costs 5% you should put all the money into your investments.

Financial experts look at mortgage as cheap money (because you pay such low interest) that frees up capital for you to invest at a high rate if return. But with the current situation the rate of return on other investments is so low you're better off investing in the mortgage.

But, retirement plans limit how much you can put in per year, so you do need to balance it. You can't pay $50,000 per year to your mortgage then when it's paid off switch it all to retirement because of the annual limit,
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Old 07-27-2009, 06:20 PM
 
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But, retirement plans limit how much you can put in per year, so you do need to balance it. You can't pay $50,000 per year to your mortgage then when it's paid off switch it all to retirement because of the annual limit,
I don't know how it works in the US, but in Canada I am pretty sure you can save up RRSP room indefinitely. There is indeed a yearly limit which is based on your income and pension plan (if any), but if you don't contribute any that year, you can use that space later. Your RRSP room is reported each year on your Notice of Assessment that you get after you file your taxes, and any unused room from previous years is added to the new amount.

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Old 07-27-2009, 07:26 PM
 
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I don't know how it works in the US, but in Canada I am pretty sure you can save up RRSP room indefinitely. There is indeed a yearly limit which is based on your income and pension plan (if any), but if you don't contribute any that year, you can use that space later. Your RRSP room is reported each year on your Notice of Assessment that you get after you file your taxes, and any unused room from previous years is added to the new amount.
It doesn't work that way in the US (for our 401k, IRA, ROTH IRAs, etc), but would be incredible if it did.

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Old 07-27-2009, 08:19 PM
 
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Originally Posted by Kyamo View Post
I don't know how it works in the US, but in Canada I am pretty sure you can save up RRSP room indefinitely. There is indeed a yearly limit which is based on your income and pension plan (if any), but if you don't contribute any that year, you can use that space later. Your RRSP room is reported each year on your Notice of Assessment that you get after you file your taxes, and any unused room from previous years is added to the new amount.
Sorry, I didn't realise the OP was in Canada. Shows how US-centric this board is. Sorry again.
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Old 07-27-2009, 10:28 PM - Thread Starter
 
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no apology needed I'm not in Canada! lol. US baby.

With my husband being self-employed we can get a SEP or something else I think that has much higher contribution limits. However I think I get the jist now, and will start the retirement account first, than pay off the mortgage, than work on the kids fund.

Thanks everyone!

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Old 07-28-2009, 09:36 AM
 
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Sorry, I didn't realise the OP was in Canada. Shows how US-centric this board is. Sorry again.
Oh, no need for an apology. The OP didn't have a location listed, so I had no idea where she lives. I just wanted to add that info, because the readers of the thread could be from anywhere, and the thread is more useful for everyone if there are posts explaining the situation in both countries.

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Old 07-28-2009, 11:35 AM
 
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Oh, no need for an apology. The OP didn't have a location listed, so I had no idea where she lives. I just wanted to add that info, because the readers of the thread could be from anywhere, and the thread is more useful for everyone if there are posts explaining the situation in both countries.
That's a good idea.
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