Reader Questions #1: Market Downturn, Mortgages, and Financial Goals
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Recently I posted on my social media channels asking if anyone had any personal finance questions they’d like answered. There were some great responses, and I’ve collected my favorites here.
I’m planning to make this a recurring series, so if you ever have any questions for me please feel free to comment, tweet, or submit a question through my Contact page. I hope you enjoy this brand new series and find the answers to these questions helpful!
How do you feel about the recent downturn?
We’re living in some crazy times. It’s definitely unnerving to see the balances in our investment accounts dropping, after getting used to them increasing for so long. However, I’m still investing money with every paycheck and am confident in the stock market long-term. We’ve seen a decade of practically constant growth, and so we knew a correction/recession would need to happen at some point.
Warren Buffett was quoted this week saying: “If you stick around long enough, you’ll see everything in markets. And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”
His point is that we need to expect the unexpected. The coronavirus may be something we’ve never seen before, but we’ve seen plenty of other negative events in the past and the markets keep on trekking.
In times like this I like to remind myself of a Dave Ramsey quote: “The only people who get hurt on a roller coaster are the ones who jump off.” If you jump out of the market now, it’s likely you’ll get burned badly. Stay the course, and in all likelihood this will be a small blip on the radar. Here’s an image that further illustrates that point that there’s always something striking fear in investors:
— Michael Batnick (@michaelbatnick) February 28, 2020
Should I pay extra on my mortgage, or is it better to save/invest the extra money?
I’ve written in the past about whether it’s better to pay off debt or invest extra money. This was something we had to balance during our own debt payoff journey, of student loans and a car loan. Those forms of debt are more urgent to get paid off, as they are usually higher interest rates. For mortgage debt, it’s largely going to depend on your personal preference and your stability. Paying down your mortgage is a guaranteed return on your money, but you are likely to achieve higher returns by investing. Here are a few factors to consider:
- Do you have an emergency fund with 6 months of expenses?
- How stable is your job and your spouse’s job?
- Is your mortgage 15 years or 30 years? What is the interest rate?
- Are you currently maxing out your retirement accounts? How much do you currently have invested?
- What is your attitude towards the mortgage debt?
Assuming you have an emergency fund and are debt free apart from your mortgage, the next step would be to max out your 401k’s and IRA’s. If you still have some funds available after that, I would do a mix of putting a little bit extra towards the mortgage and then the rest towards additional investments in index funds. Ideally I’d be looking to shorten the time frame to debt freedom, but my primary focus would be more towards accumulating as much as possible in investments. There’s no one right answer, and whichever direction you decide to go in you’ll be in very good shape!
What should you do with your money when you’re completely debt free?
Reaching debt freedom is a huge step! Once you’ve gotten to that point it’s time to start thinking of other long-term goals you want to pursue. The money that was going towards paying off debt can now go towards investing and saving for other financial goals. Do you own your primary residence or would you like to start saving for a downpayment? Are you maxing out your retirement accounts? Do you have any interest in owning rental properties? Take some time to think through your long-term goals, and start putting the money towards making those happen. When we reached debt freedom we ramped up our investing as we pursue financial independence, built up some additional cash savings, and traveled on a few trips we had been putting off.
What other big financial goals are there to attain?
I like to think of financial freedom as a spectrum. The first step is to get organized and create a gap between your income and expenses. Over time you build up an emergency fund, get debt paid off, and start investing. After that, there are a lot of different paths you can take.
A few big financial goals could include:
- Investing for retirement
- Owning a primary residence
- Owning rental properties
- Traveling
- Paying for kids’ college
- Giving to charities
The ultimate goal should be to reach financial independence, which is the point where your investments can cover your living expenses without having to work for an income. When you reach this point you have the option of retiring.
VTSAX or VFIAX?
To back up a bit for context, this question is asking about two different index funds and which one would be better to invest in. I’ve written in the past about how we keep our investing strategy simple with index funds. Both of these funds are offered by Vanguard, VTSAX is the Total Stock Market Index Fund Admiral Shares and VFIAX is the 500 Index Fund Admiral Shares. The 500 is for the S&P 500, which is the 500 largest publicly traded companies in the U.S. Both funds have the same 0.04% expense ratio (the yearly fee you pay for owning the fund).
VFIAX contains 508 of the largest stocks in the United States (some companies in the S&P 500 have more than one “class” of stock). On the other hand, VTSAX has these same 508 stocks, along with an additional 3,058 stocks from smaller U.S. companies. The 508 companies are weighted more heavily than these 3,058 smaller companies within the fund, meaning that about 75% of VTSAX is composed of stocks from the S&P 500.
All this being said, these two funds are extremely similar and tend to have nearly identical market returns. Either one would be an effective long-term investment.
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