I have a “first-world” problem with a twist, and I could use your advice. I recently sold my rental townhouse for $325,000. It was already paid off without any encumbrances on the property. After paying the title transfer and capital-gains taxes of 15%, I have $309,000 in cash.
Question 2 (the juicier question): How do you think I should best convince my wife that simply paying down our current mortgage is not the savviest of moves? That’s her knee-jerk “safe” response.
She is very good with day-to-day finances and being a saver, but she leans more toward living below our means and “stuffing money in a mattress” over trusting the stock market’s historical long-term rate of return and properly leveraging debt. For instance, she’d rather pay off the $15,000 note on my car, which has a 0.9% interest rate on a 5-year schedule with 3.5 years left, than give the difference to our financial planner to invest.
That’s the scenario with the proceeds from the sale of the townhouse, but essentially supercharged.
She’s stressing herself out, because she intellectually understands the financial benefit of annualized 9% to 11% historical returns, but she has an emotional, visceral response to debt and the risk of the market tanking.
‘I am very good at what I do’
I am a corporate attorney with an in-demand specialty in a growth industry. I am very good at what I do. I make around $250,000 a year with bonuses, without the slog of having to kill what I eat. I also have the potential for salary growth and a promotion, which I anticipate will become a reality in the next year or so.
My wife is an elementary-school teacher. She makes about $70,000 a year.
I also hang a small shingle with my specialty. I have only had a few clients via word of mouth from prior customers and have not invested in advertising, but it’s easy money. Before taxes, I made just under $50,000 in the past year without really trying. I don’t want this business to grow too much as it’s just me, and I work enough with my 9-to-5 job.
We have a good work-life balance. We have two kids and we’re generally a happy bunch. I maxed out my wife’s 403(b), and my 401(k) was already maxed out. I set up a SEP-IRA for my business with my financial planner and put a healthy down payment on tax-advantaged solar panels with a 0% loan.
‘We own a $800,000 home’
We are in our very early 40s and have 529 plans for both children that our financial adviser says are on track. We own a $800,000 home with $491,000 left on the note at 3.25% for 30 years. I overpay a few hundred dollars a month, so we make the equivalent of an extra payment a year.
Between old Roth IRA accounts, that new SEP account and our 401(k) and 403(b) plans, my wife and I have a retirement portfolio worth just over $600,000 all in.
Aside from the house, the only debt we carry is the loan for those solar panels (which will pay for themselves with the electricity savings), and my car. We do not have credit-card debt, and we have six months of emergency savings between cash in the bank, renewed high-yield savings accounts and a money-market account.
There is also a part of her that wants to simply throw her hands in the air and put some of that townhouse money — about $70,000 — into a new kitchen for her to enjoy, so as not to totally lose the money spent. I think our kitchen is just fine.
‘My wife is a saver, but emotional’
My wife is a saver, but she is emotional about her money decisions. My preference is putting all of this money in the market. However, this must be a 50/50 decision, even though I am the breadwinner.
Cry me a river, right? I get it. We have problems of the 3%. We’ve taken advantage of every tax shelter we have at our income level, and now we have to figure out what to do with the proceeds.
In our defense, no one gave us any of this. We are good with our money and have made sacrifices and sound financial choices over 17 years of being together to get this far: paying off the townhouse as we rented it, paying off my business-school and law-school loans. I studied in the evenings after work.
I’d rather her be happy paying down a significant amount of the note on the house, if it makes her more comfortable, even if we are leaving money on the table. She doesn’t like that approach.
Our financial adviser tells us: “I can get you 10% [return] instead of you saving 3.25%. Your stock portfolio’s cash value should double every seven years.”
Why lock up more than $300,000 in the walls of our home? It’s illiquid and the cost of a home-equity line of credit is through the roof.
I then suggested splitting the difference and she said something like, “No half measures.” I think she has watched “Breaking Bad” one too many times as she stresses about all of this.
What advice can you give? It’s part emotional and part financial.
Sincerely,
Woe Is Us
Dear Woe,
The biggest reveal in your letter came at the end. Your wife told you, “No half measures.” You’re either all into paying off the mortgage on your house, or you’re in a stalemate. That said, people push to get what they want — often due to fear or ego — and their resolve can soften over time. Time + stalemate = compromise. And that applies to you, too.
There are three advisers in this relationship. Of course your financial adviser is going to advise you to invest the money with him. That’s his job. His job is to advise, but that does not necessarily mean he will advise you to do something with your $300,000 that involves a situation where he would not make a fee or commission.
But it is a red flag when any financial adviser pushes you to entrust them with a large sum of money and suggests that they will give you guaranteed returns, especially if they’re talking about a 10% return. The stock market has been extremely volatile, and we are entering a period of uncertain economic growth. And if an adviser says they can beat the market? Insert red flag here.
Your letter is a great example of how patience, hard work, compound interest and taking calculated risks — like buying a rental home — can yield benefits, peace of mind, a secure retirement, a happy life and dilemmas that millions of Americans would kill to have. You have earned your right to feel satisfied. You acknowledge that your letter is part humble brag, but you have earned it.
Three specific responses to your question
Your wife is a schoolteacher. She earns $70,000 a year. If there was any justice in this world, she would be earning twice that. She needs to nurture those kids, educate them, deal with their ups and down, perform for them when she feels like staying home, and hopefully instill in them hope and the expectation that they can be somebody. You’re both breadwinners.
How do you best convince your wife that paying down the mortgage is not the best decision? The clue, my friend, is in the question. If you are both trying to “convince” each other, you are coming from a position of “I’m right. You’re wrong.” On your side, it’s your way or no way, and — from what you say — it’s the same on her side. Instead, endeavor to find the value in each other’s point of view.
One solution is to say, yes, there can be no half measures. So go all in with thirds: Invest $100,000, use $100,000 to pay off your some of your 3.5% rate mortgage and keep $100,000 so you can both have space — and, crucially, humility — to live with your decisions for a year or so, just as you would with a house before you renovate it.
Three ways you can navigate this impasse
It may be that you decide to use $70,000 of that remaining $100,000 for a kitchen renovation, or you might put some money aside for long-term-care insurance, or perhaps you will opt to put the remaining cash into a vacation fund for your retirement, which could double as a backup emergency fund. Call it splitting the difference or taking equal responsibility for your decisions — because you are equals, regardless of salary.
So hear each other out, and remember that you did not reach this place in your life by stonewalling each other or blocking each other, or by telling your wife that she makes emotional decisions while you make clear-headed, rational ones. Your letter is comprehensive and well thought out, but it is also brimming with self-will. Frankly, you are both emotional.
Finally, don’t judge each other for coming to a different conclusion. I think it’s a fine idea to pay down your mortgage. It’s also a good idea to have some extra cash on hand, especially with the uncertainty in the U.S. economy, and it’s a smart idea to invest in the stock market, especially given the drop in stocks over the last year.
You got this far by listening to each other. Don’t hit the brakes on that successful strategy now.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
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