I’m maxing out my 401(k). My income is high enough that that is really my only tax-advantaged savings vehicle available to me: 1) I’m past the deduction for the traditional IRA and 2) I’m past the Roth IRA income eligibility for single filers or pretty close to it.
I’m not the sort of person who would *not* take out a loan to invest. I’m the sort of person who would have more job security if I lowered my yearly fixed expenses by $14,469.48 than by having a larger amount of money in the bank.
This would be a somewhat different decision if I, like nicoleandmaggie, I had a ton of tax-advantaged savings room that I would give up if I didn’t use in a particular year.
I also have this strange goal to have an Admiral Shares index fund. So since I can’t get it in my Roth IRA (my account has dipped below the $10,000 that I have contributed to it) and I don’t plan on leaving my employer anytime soon and rolling over my 401(k), the only place I could do that is in a taxable account. I need about $3,600 to accomplish that goal.
I have some more things that I want to do/buy for my condo:
- Re-paint the second bathroom and the hallways – $500?
- Fix the closets in the master bedroom – $500?
- Buy a bed to put in the second bedroom for guests – $500?
- Buy a small table to put in the front entryway – $500?
(I realize that some of these estimates are probably way off, but the total could likely add up to $2,000.)
- Money in my condo savings account right now less the projects listed above: $6,400
- Savings planned for this month: $12,000
I’m going to take the money necessary to reach the Admiral Shares index fund goal out of my condo savings account, leaving it with $4,800. I’ll leave $2,000 in the condo savings account for those projects, so I’ll take $2,800 and pre-pay the mortgage principal. I’m also going to take the money from my bonus this month and the savings from my paycheck at the end of the month and pre-pay the mortgage. Anything that is leftover in the condo savings account will end up going there too, as well as whatever I get as a refund of the deposit on my apartment (I’m guessing about $100).
Between those two, the mortgage balance could be down to $271,100 by the end of the month, before my first payment is even due! Right now, I see about another $10,000 in savings funds for the year (August through September), which projects an EOY balance of $261,000 (plus a bit lower from the principal in regular payments, maybe just under $260,000), which is below where I need to be to be on track to pay off the mortgage in five years.
It is actually super easy to make a principal only payment on my mortgage. It’s at the credit union I use for my daily banking. I just go to the transfer screen, select the from account (checking or savings), set the to account as the mortgage, enter the amount, and then it confirms whether it is an early payment or a PRINCIPAL ONLY (their emphasis, not mine) payment. It seemed too easy to be true, but the balance was updated correctly based on my payment!
So, in summary: I’m going to use the tax-advantaged savings vehicles that I have, which is only my 401(k), and pay off the mortgage ASAP with the rest since I have a comfortable cash reserve of $24,200, ignoring my goals of investing 20% of my gross income or investing in taxable (other than having an Admiral Shares index fund) or generating $1,000 in passive income for the year.
Maybe I’ll re-evaluate this plan each month, but this is what I’m going to do this month. Mortgage balance after my first (!) pre-payment is now sitting at $283,200!