Our 3 Best Money Choices—#1

Jun 6, 2013 by

shell game - money choicesBuried in my files is a small clipping from the February 27, 1983 New York Times. (Yes, I was reading the NY Times before many of you were born, when a newspaper was something you held in two inky hands and spent a glorious Sunday absorbing. :-) ) The article is about the retirement of Judge Harold R. Medina after thirty-three years on the Federal bench. I clipped the article because I liked the concluding paragraph:

Many biographers would say the judge has had an illustrious career. “Well, I tell you,” he says, “my career has been a series of mistakes. As I look back, I see nothing but mistakes, but in one way or another they all worked out to my advantage.”

I submit that is pretty nearly the ultimate in modesty. I suppose Judge Medina’s charming outlook on life struck me because my mistakes tend to stick in my mind for a much longer time and more vividly than my successes. That’s really a bad characteristic! Judge Medina taught me a lesson: When looking back, whether you consider a decision to be a mistake or triumph often is a matter of perspective.

Let’s Celebrate Our Good Money Choices!

In the spirit of Judge Harold Medina, this post kicks off a three-part mini-series. I’ve spent a lot of time thinking about (well, okay, I dreamed this up during my toilette this morning) what I judge to be the three best money choices we’ve made (Ms. Money Counselor gets credit too).

I encourage you to play along and celebrate your own Big Three best money choices. Yeah, so maybe you took out a payday loan once and maybe you blew the emergency fund on a Hawaiian holiday and so had to put the car repair on a credit card and maybe you bought Lehman Brothers stock when esteemed Wall Street analyst Dick Bove said you should—25 days before Lehman’s bankruptcy filing—and maybe like me you’re expert at buying high and selling low, but let’s forget all of that for a while.

We’ve made some great money choices too, right? Right?  Or maybe, like Judge Medina, you’ve made mistakes that worked out to your advantage! Either way, let’s take time out from lamenting what we’ve done wrong to celebrate what we’ve done right!

Our 3 Best Money Choices: #1 — Paying Off the Mortgage Early

I know this is controversial, and I’m surely not suggesting that everyone should always endeavor to pay off the mortgage early, regardless of anything. But for us, looking back on it, I think retiring our mortgage when we did was probably our single best money choice.

The Details of Our Mortgage

We bought a house in a suburb of Saint Paul, Minnesota on October 1, 1996, three months before we got married. We took out a 15-year, $100,000 mortgage at 7.5% (a good rate at the time!) on a house for which we paid $162,125. Our monthly payment was $927.02 for principal and interest only. With escrow for property taxes and insurance, our monthly payment was $1,216.04.

Had we kept to the note’s payment schedule and stayed in the house (we moved in 2009), we’d have made our last payment on October 1, 2011, less than two years ago. (Wow. It feels like a lifetime ago that we bought that house.) But instead, we resolved to pay off our mortgage early, and we were fortunate to be in a situation and have the knowhow to do it.

Our Accelerated Mortgage Payments

Here’s what riveted my attention about our mortgage: $625 of our first payment went for interest. Total interest paid would be nearly $67,000 over the 15-year payment schedule. Of course we got a tax deduction, so the effective cost was a bit less, but still. I hate paying interest, and this amount monthly was a huge pill for me to swallow.

Looking back at our Quicken records, we first made an extra principal payment—$10,000—in February 1999. (I also see that I lost $88 at the thoroughbred track on June 12, 1998, but never mind that right now.) In October 2001 we made a $6,000 additional principal payment, leaving a balance of $59,653.16.

We must have made a New Year’s resolution to pay off the remainder of our mortgage in 2002 because then we went on a tear, making these extra principal payments: $7,000 in January, $32,000 in April, and $7,000 in June. I don’t remember now where the cash was coming from—certainly not current income, so we were selling or divesting from something (CDs for instance—they actually carried a noticeable interest rate in those days)—but in July I got from the lender a payoff amount and sent it in: $8,098.96.

We invited over a friend who’d paid off his mortgage some years earlier, had champagne, and burned a copy of our mortgage document in the fireplace, just like in the movies.

The Benefits of Paying Off the Mortgage Early

I figure we saved about $40,000 in interest vs. the prescribed payment schedule. Now I know what you’re thinking: We could have done better had we invested the extra money we paid toward principal in stocks. None of us can know whether that’s true, but I will make a few observations:

  • You wouldn’t know it from the hoopla on Wall Street and CNBC, but the S&P 500 Index is roughly at the same level today as it was in 2000.
  • While pre-paying our mortgage, we continued to sock the maximum allowed into retirement accounts, most of which went into stocks.
  • If we’d let our mortgage play out until October 2011 and invested more in stocks instead of prepayments, we would have had more money at risk when enduring the stress of first the “dot-com” crash and then, just seven years later, the financial meltdown. What would we have to show for that extra punishment? Not much, I’d suggest. Instead we knew that we wouldn’t lose our home, like millions of Americans have since 2008, no matter how bad things got.
  • Our investment in our mortgage earned a guaranteed, risk-free pre-tax return of 7.5%. I think even Warren Buffett would jump at such an investment opportunity today.

But for me the biggest benefit of paying off our mortgage has been psychological, not financial. It’s FREEDOM, my friends: Freedom to quit a job abruptly if need be, freedom to pursue a dream or an opportunity, freedom from being a slave to the bank, and freedom from the threat of foreclosure should things go badly wrong in our lives.

NEXT: The second of our three best money choices

What was your best money choice ever (next to subscribing to Money Counselor)?

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  • http://retireby40.org/ Joe

    7.5% is a pretty good guaranteed return. If our rate is that high, I would pay it down more aggressively too. I’m paying down and balancing investing for now.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Sounds very rational Joe. Thanks for stopping by.

  • Pretired Nick

    Totally agree! I’m a big advocate of paying off mortgages early. Even if one decides to invest some of what would have been principal, I still say pay it way down and the refinance so your payment isn’t killing your cashflow. Great job being ahead of the game!

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Thanks Nick. Call me crazy, but I’m partial to investments with returns modified by the words “guaranteed” and “risk-free.”

  • Greg

    I can’t wait to be in your shoes on this one some day. We are working on my wife’s med school loans first, which are higher than the mortgages. Once that one is over, we will attack the mortgage for sure.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      You’ll get there Greg, I feel sure. And when you do my guess is you’ll be considerably younger than I was when we managed to free ourselves of debt. And we didn’t start out with big school loans either, so we had a head start compared to your situation.

  • http://prairieecothrifter.com/ Daisy @ Prairie Eco Thrifter

    Sometimes, good money decisions are all psychological! Money is personal and if you get peace of mind from doing something, that is great. My best money decision was to work full time throughout college to pay for most of it out of pocket.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      Well done! I hope you’ve been able since graduating to catch up on the sleep you surely didn’t get during your college years.

  • squirrelers

    I like the theme, should shape up to be a good series – and it’s off to a good start. The freedom aspect you alluded to late in the post is what really resonates most. It’s not material things, it’s financial freedom. I don’t have that at the moment, but it’s a long-term goal I’m working toward.
    Best move for me? Toss up between saving money when younger, and investing in going to grad school with a low investment.

    • http://mymoneycounselor.com/ Kurt @ Money Counselor

      I really like the idea of investing in yourself through more education or training. The payoff can be huge in the form of incremental income. I wrote about it here: http://mymoneycounselor.com/invest-in-you

  • Tortoise Banker

    I don’t know why, but I don’t usually buy into the whole “I get a tax deduction because of the interest I pay on my mortgage.” I think this leads a lot of people to buy too much house as they don’t understand that sometimes its still better to take the standard deduction even if you pay 8,000-10,000/year in interest.

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