I decided to mix it up the other week on my radio show and bring on a guest co-host, my buddy Marc Williams. You may know him as Mr. Kinetik. Marc is an educator by day and an MC and entertainer by night. Since I always answer at least one email question on the radio show, I decided to read the question and let Marc answer first. Not to put the pressure on him to get it right, but because I was genuinely curious how he would respond. Here’s the question I read to Marc:
My husband and I are always reading and sharing your columns with each other, great advice! While we agree we should be saving our money and living below our means, we have a difference in opinion on what that looks like. My husband and I are 27 and 28 respectively, we are both currently working full-time, and do not have children, but plan to in the future.
A quick snapshot of our financial situation: We both work full-time but only live on one salary, meaning we save more than 50% of our total take-home pay. We put the max on our Roth IRAs and HSAs, and meet the match with both of our 401(k)s. The rest of our savings sits in a money market account that we’ve dipped into a couple of times for major expenses, like a new car. We own a two-bedroom home and have a 15 year mortgage that we are on track to pay off in 11 and a half years. We were very fortunate and both had parents that saved and paid for our college educations so outside of our mortgage we have no other debt or monthly payments.
My question is, what should we be doing now with the money in the money market account that will set us up for long-term financial stability? We both hate that it just sits there earning less than 1%. It’s tempting to use for big ticket items, like the car, so we’re not really budgeting off our income. My husband thinks we should spend the next two years aggressively paying off our mortgage. I disagree, as we have a fairly low interest of 3.7% and this isn’t our forever home since it’s only two bedrooms. I think we should find other ways to invest, as well as be more generous in our charitable giving. Help us solve the debate. What would you advise based on our current situation?
A House Divided
Marc’s take on the situation:
I don’t see the harm in paying off the mortgage and focusing on giving more charitably. I would also explore investing the funds in the money market account in something else.
I get why Marc took this approach, many of you would also have the same initial thought on the situation, but I see something not-so-obvious in this email. This couple has excellent short-term financial stability, they may even have decent mid-term financial stability, but what they are seriously lacking is long-term financial stability. They are maxing out their Roth IRA which is great, but the key here is they are only putting funds into their 401(k)s up to the match. This isn’t good enough, the match never is. If you only ever invest up to the match, you’ll reach 65 and be sorely disappointed in your retirement prospects. That’s why the best plan of action for this couple is to focus on aggressively increasing their retirement account contributions until they are maxing out the government cap, which this year is $18,000.
Your husband’s instinct to pay off the mortgage would benefit you more if you were in your late 40s/early 50s, but at your age you won’t see the true benefit. And while you have a decently low interest rate at 3.7%, your retirement accounts will most likely earn more than this.
I’m also a huge proponent of giving charitably, working charitable contributions into your plan is always a smart idea.
Check out the segment here:
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.