Paid off mortgage. Now what?
Nov 25, 2018
Last week I answered a question that was sent into me and this week I thought I would do something similar. I really enjoy hearing what problems YOU are facing and I like finding a few solutions to them in an effort to help you out. This question was sent in by Declan a while back, but it is one that crops up in my inbox relatively consistently as well, so I thought back to what I did and what I would do if faced with the situation he is proposing again. Now, I like to remind you from time to time that I’m not a financial advisor, I just write about what I have done and what I would do in any given scenario. At the end of the day, YOU do YOU...
Declan’s Question:
Now that we've paid off our mortgage how should we allocate our income? A large portion was going towards the mortgage. One of the main areas I'm looking at is how to invest.
Jonny and I had spent so long focussing on getting rid of our debt that we didn’t put a great deal of thought into what to do once it was gone. But it’s a fact that when you stop paying your mortgage at say $500 a week, you now have a “pay rise” of $500 a week because that money now stays in your account. That’s $26,000 a year. And it's ALL YOURS to do with what you will!
So, if I found myself in this position again, with the knowledge I now have, this is what I would do with that $500 a week:
1. Announce on social media that “Friends, I have paid off my mortgage!!!! This is freaking awesome!!! None of you may be aware that I was even doing this but I have been on a debt marathon and now it is OVER. Please, please contact me if you want some tips on how not to be in debt for any longer than strictly necessary. I would love to help you”. In New Zealand, we don’t celebrate our successes enough because this might be considered bragging and that stops us talking about money and helping others. Bragg away! This is a HUGE milestone in your life. Email me and I will sure as heck congratulate you!
2. Set aside a one-off amount of $200 and go and celebrate. Only $200 I hear you gasp? Yep, you have paid off your mortgage, you have not won Lotto. And for those who have focussed on spending as little as possible for so long, even blowing $200 can be quite a challenge.
2a. Just like climbing out of debt was a lengthy process, growing wealth is similar. I’m going to avoid the trap of trying to find a get rich quick investment like Bitcoin, Harmoney, starting a business or buying a rental property. Don’t be in such a hurry! Use your spare time to read and learn about investment options instead. It’s’ time to plan.
2b. Also I would ask myself “is $500 too much to set aside each week”? Had paying the mortgage at this rate been a stretch for me and my family? Was I putting off fixing the car or the leak in the roof because so much of our income went to debt? If so, maybe it’s time to ease back and use some of that income for day to day living (while still not wasting it) in which case I might choose a lesser sum to invest each week.
3. Taking on debt is no longer an option for me so I’ve got to get myself into a position to look after myself when something goes wrong. So the first thing I would do is set up a high-interest bank account named “in event of an emergency…” and put the entire $500 in there every single week until I built it up to about four months worth of expenses. And then I will get myself acquainted with the fact that I may NEVER USE THIS MONEY, in fact, I hope I never have to. It may just sit there for 20 years doing nothing, earning only a little but the point is IF an emergency strikes, I’m sorted and I don’t need to rely on a credit card to sort out my problem. Over time this amount will be small compared to the rest of my investments. In my case, I know what I earn and spend each month and hope you do too. My emergency fund needs to sit at $16,000 to enable me to sleep well at night. This will take me 32 weeks to build up, so that is the first eight months shot basically!
4. But to give me something to do in the meantime, because most of us are itching to get started, I’m going to take a look at my KiwiSaver fund and check I’m in the right one, plus I’m going to make sure I’m getting my contributions from work or that I’m voluntarily putting money in for Jonny because he is self-employed. There is absolutely NO CHANCE that we will be missing out on the government contribution of $521 each. I’m OK with tying money up in here until I turn 65 because I’ll also be investing outside of my KiwiSaver.
5. I’m also going to take a long hard look at my bank. I’m going to make sure that they remove the mortgage from the title to MY home (discharge it) and I’m going to cancel ALL lending. Yep, I”m done. And I am going to ask myself “do I still like them, did I ever like them, or should I change?” They provided a service as I paid back my loan to them but are we still a good fit when it comes to now becoming a saver and investor? Debt is complicated, especially for those who have “offset this, that and the next thing”, but saving is not. So now I just want a couple of simple accounts and I want to pay little or nothing for them while earning any interest going: one for my daily spending, one for my “in the event of an emergency” and one or two for saving.
6. I might also take this opportunity to ask for a pay rise or find a different job that earns me more. When you don’t have a banker breathing down your neck you can do these things you see. The pressure comes off. Any extra income I do bring in does not get spent on an updated sofa, but goes right into my savings and investing. Nope, still have not won Lotto you see, I’m just living within my means, enjoying life AND planning for a rosy future.
7. Right, eight months have flown by and I’ve got my emergency fund fully stocked, I’ve got my KiwiSaver on auto-pilot and now I have started putting that $500 a week into my savings account. Now I want to put it to work to grow my wealth long term. Why Oh Why I didn’t learn about Index Fund - ETF investing when I became debt free at the age of 33 I will never know, probably because they were not around. Hindsight is a wonderful thing, right? But if I were to have my time again I would just find a low-cost fund and start investing my money with them on a monthly basis.
How do you choose which fund to invest in? Here are a few providers for you:
I would do my research (some require an initial lump sum and some don’t), pick a provider, choose just two funds (to avoid doubling up) and buy steadily and consistently over a long period of time i.e. 10 years plus. In my case I buy the US 500 fund and the NZ Top 50 with SmartShares, so that means I have a tiny share of 550 international and national companies. All of their owners and employees toil away each day, doing their utmost to be successful and I get a slice of their profits, which I reinvest. For every month and year that goes by compound interest is also accumulating and helping my wealth to grow and as the markets rise and fall I buy a set amount each month without fail. If a windfall happens to come my way, I invest that as well. Here is a forecast of what the numbers could look like:
The historical 5 years annualised return for the NZ Top 50 (after fund charges and tax of 28% has been paid and assuming distributions are reinvested) has been 12.20%.
Here is what I could have after 5 years:
NZ Top 50 after 5 years. Click image to enlarge.
Here is what I could have after 10 years:
NZ Top 50 after 10 years. Click image to enlarge.
And after 20 years:
NZ Top 50 after 20 years. Click image to enlarge.
8. I mentioned that I might create two savings accounts. In my situation, one is where I syphon off money for my funds and the other is for saving for a particular item or event. At the moment we are saving for a holiday next year, so each and every week I have an automatic transfer set up to put money into this account. When I hit my target we can book some tickets. But I will NOT be raiding my emergency fund in order to take a holiday and my long-term investing does not suffer either!
Our financial plan is pretty simple but its working for us. When we paid off our mortgage we just muddled by, made some dumb decisions like buying five brand new cars (true that), and eventually created the system that I use today; however it was very easy to get distracted along the way and it took me some time to settle onto this path. We wasted precious time and missed out on investment returns in the process. When paying down debt you make your regular payments, you dare not be late with them, and that’s about it. Yet when it comes to investing we suddenly get all excited about it and want to try everything and anything. But this scattergun approach is unlikely to work because it’s not “diversification”, it’s “ooh shiny new investment, I want to try that”! So, now I manage to avoid MOST of that temptation, stick to my routine of investing on a particular date and I just stick with the basics and get on with the rest of my day. I still have a play around with some new things (like the NZ Property fund that I’m dabbling with using Sharesies), but that is currently minor and in addition to any regular investing.
Now, this has all been plain sailing as we have had a strong share market for many years now, but all the pundits are predicting that this bull market is drawing to its natural close and what went up may well come down. By that, they mean share prices. But my buying will continue because as the share market rose, each month that I purchased I received fewer shares for the same amount of money. If the market drops then the reverse is going to be true. For the same spend, I will receive more shares. The giant test will be can I hold my nerve and keep on buying if and when the share prices are dropping 10%, 20%, 30%...? That is certainly my intention.
I do not have visions of becoming the next Warren Buffet, that man is a freaking genius, but I do listen to what he says and that is that you only lose IF you sell. Well, prices may begin to drop but I will not be selling, I will instead hold my nerve, hold my line and continue to invest as shares inevitably come on sale. And when the market drops, then over time it will rise again, because that is the path it has taken throughout its history.
This strategy fits ME for NOW at the age of 45. I don’t need the money I carve off for investing because I’m still working, as is Jonny. As the years march on I’ll reassess how much we have, where we have it and how is it performing and somewhere down the track I will rejig things and remove some money from the volatile share market, but for now we are happy with the path we are on.
So there you have it Declan, my thoughts on what I would do if my mortgage payment of $500 now remained in my own bank account. Buying your own home and then paying it off completely is just one piece of the puzzle. Once you tick that off your list, you just pick up another piece and keep on moving.
Nowadays there are useful books and online tools to help you plan YOUR OWN path. So check these links out:
