Thoughts on Dave Ramsay’s Baby Steps in an NZ context?

[robbentley]

1. Save $1,000 for Your Starter Emergency Fund.
2. Pay Off All Debt (Except the House) Using the Debt Snowball.
3. Save 3–6 Months of Expenses in a Fully Funded Emergency Fund.
4. Invest 15% of Your Household Income in Retirement.
5. Save for Your Children’s College Fund.
6. Pay Off Your Home Early.
7. Build Wealth and Give.

 

[resjudicata]

@robbentley The US gets to fix their mortgages for 30 years so can delay paying down their mortgage to invest. With fluctuating rates and a lack of surety about how high they will truly peak, it's in my interest to pay down my loan faster. This means hitting that 15% retirement investing much harder

 

[lukeplyr83]

@resjudicata My approach is always to pay at least the minimum to the mortgage and invest at least the minimum required to hit your retirement goal by retirement age as compounding can really make it easier to reach that goal. Everything above those 2 minimums can then be based on where you expect to get the best return or what suits your goals or personal circumstances best.

Ex. A $575 monthly contribution (8% return, 3% inflation) every month from age 20 results in a $50k a year in retirement. At age 30, that is about $1025 per month. At 40, that is $1875 per month. At 50, that is $4k a month. At 60, that is $12,750 per month. (All numbers are approx)

Lots of people have a goal to be mortgage free by 50, but without other investments before the mortgage is paid, they may struggle to fund an adequate retirement.

 

[bluerose31]

@lukeplyr83 My mortgage will be paid off when I'm around 70. Is that an issue to consider?

 

[lukeplyr83]

@bluerose31 Nah, you won't be retiring at all in that case so this doesn't really apply to your situation

 

[bluerose31]

@lukeplyr83 So your advice is to not pay off your mortgage early and invest, but then if you haven't paid off your mortgage you can never retire CFA right

 

[lukeplyr83]

@bluerose31 Lol, actually here is another article from today aswell. (Ignore the obvious advertisement for whatever investment firm it is). Guess you got some reading to do.

 

[bluerose31]

@lukeplyr83 Your comments are contradictory, but the link has no relationship to your comments regarding mortgages and retirement so it doesn't naturally follow your position.

 

[lukeplyr83]

@bluerose31 Nope. My advice, if you re-read it, is to make AT LEAST the minimum payments to investments and mortgage at all times. Then, allocate your additional resources based on a mixture of your personal financial situation & where you will get the best return. If that means to you paying off mortgage early, then do it but not at the expense of having no retirement savings. If that means to you making additional investments so you can retire earlier, then do that. But always do at least the minimum to both.

My comment to you was based on you advising you have taken a mortgage you don't expect to repay until 70. Carrying debt into retirement, unless you have significant investments or secure non-work related income, is generally considered a poor financial move. Based on your phrasing, it sounded like you have neither of these (I hope I'm incorrect and read that wrong), which means at 70 you will have nothing to fund your retirement with.

 

[littlepenguin]

@lukeplyr83 Oh wow, look at this guy with his "additional resources"

 

[bluerose31]

@lukeplyr83 Thanks for clarifying. So the advice is to pay off the minimum off your mortgage and pay minimum payments to KiwiSaver always and this does have the air of sound advice. What is the minimum to KiwiSaver however would be obvious next question.
The next question for financial advise meant is now that you consider my financial decisions to be poor, because of having a mortgage in retirement, but renting is also considered not ideal (as per your previous links). So the answer to not have a mortgage but not rent. Is the obvious next step, failing a time machine invention, to die early I'm guessing

 

[lukeplyr83]

@bluerose31 To be clear, I'm am not talking about only kiwisaver, you should be investing outside of that, and I am surprised you are confused. I'll try and be clearer.

To work out the minimum you need in retirement is simple. You work our your current expenses, multiply those by 25 and that is a ball park figure you need saved for retirement. You can then use any number of online calculators to work out how much you need to be investing regularly to meet that goal by your target date.

For your mortgage, if you expect to carry that debt post retirement, you need to have substantially more saved to cover that ongoing expense using the above. However, the chances are, if you expect to still have a mortgage at 70, then having enough to save beside the mortgage to have 25 times your expenses is highly unlikely.

To break it down to its simplest form. If your minimum mortgage payment is $500 & you work out your minimum investment requirement to be $200 a week, you work your budget from this $700 absolute must pay. Then, if after everything else is paid, you have an additional $100 left over you can put this additional to your mortgage to pay that off sooner OR put it into your investments so you have a larger nest egg at retirement or can retire early. But you can't take the $200 minimum investment and put that off the mortgage otherwise you simply won't have enough years to catch up due to compounding.

If you can only afford the $500 to your mortgage, though, you are in trouble. At 70, your mortgage is now paid, but what then? How do you fund retirement? You need to keep working because your paid off house doesn't buy you food or pay for power.

Now is the time to know the answers while you have time to adjust your plan. The later you leave it, the harder it is.

PS those articles are talking about people working in retirement due to not being prepared and the effect of not having enough invested over time for your investments to compound into a meaningful nest egg which is exactly my point.

 

[lukeplyr83]

@bluerose31 This is a well timed article thar might be of interest to you

 

[bluerose31]

@lukeplyr83 None of those apply and I'm still not following how they somehow underpin your position sorry. Not too worry I'll find some other stuff articles

 

[bluerose31]

@lukeplyr83 Even when I'm dead? Weekend at bernies type situation is it

 

[resjudicata]

@lukeplyr83 I've got a large mortgage so my numbers add up different. You also need to factor in tax to the return equation. Monthly interest component versus principal is a bitch. I'm paying down my mortgage for the next 5-10 years as much as possible then switching to a more 50/50 allocation.

There's no reason to do an either/or approach, you can do both. But hitting 15% can be tricky when doing both.

 

[dave68]

@resjudicata Correct. I’m one of those with a 30 yr 3% fixed rate

 

[barbarossa]

@resjudicata Yes if I had a fixed mortgage at 2.45% -3.25% for 30 years like some people in the US do I'd be investing more and not worrying about the mortgage as much? I had a rate of 2.45% until this month and was getting more intrest with that extra money in A TD.

 

[hanna123]

@resjudicata Either way you are investing against retirement.

When interest rates are low it makes sense to invest rather than pay off mortgage. You are essentially leveraging low interest rates.

When rates rise, the mortgage becomes more of a priority.

This is essentially the same formula that’s happening in the wider market - a big part of why shares shot up in price when rates dropped and fell back as rates rose.

Inflation complicates things a bit - assuming wages rose with inflation (a big assumption) paying off the mortgage lightning be quite as optimal as inflation will eat away at it too.

 

[manoah]

@robbentley Debt snowball worked for me. An emergency fund is a good idea, saving, staying out of debt and paying off your house early all make sense to me.

Some of his stuff is a bit religious or not entirely relevant to NZ but some of it has helped me out.