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The Thing We Never Talk About is an educational podcast about personal finance for creatives and other weirdos. We'll discuss managing cash flow with a lumpy income, when to save & when to invest, and how to reduce stress & build confidence when it comes to your money. No hot stock tips, no complicated strategies, and no finance bro jargon. We'll hear from artists, musicians, creative professionals, and other weirdos about how they navigate these questions for themselves. The Thing We Never Talk About is hosted by Timothy Iseler, CFP®, a former recording & touring audio engineer with 18 years experience in the music industry.
Timothy Iseler, CFP®: Hi everyone.
Welcome to The Thing We Never Talk About.
My name is Tim Iseler.
I'm a certified financial planner, and I
run my own independent financial advisory
business, helping musicians, artists,
And other people with weird jobs make
smarter decisions with their money.
You can learn more at iselerfinancial.com.
If you have a question you would like
me to answer in a future episode, please
visit iselerfinancial.com/podcast.
And if you like what you hear you can also
subscribe to my Keep It Easy newsletter
at iselerfinancial.com/newsletter.
Today I want to share a case study from
work I did recently with some clients.
I like sharing case studies because
it both gives you an example of
what financial advice or financial
planning looks like, and it can
also help you understand the kinds
of questions you should be thinking
about in your own financial life.
So here's the setup: my clients were a
married couple with two young children.
They both work full-time and own
their home, and they've actually been
paying more than the required minimum
payment for their mortgage each month.
And they expect to receive a one-time
windfall from a property sale.
I'm not sure that the number is super
critical to this story, but for context,
it is several hundred thousand dollars.
In other words, it's a meaningful
amount of money, and they want
to make sure they use it wisely.
In particular, they wanted to compare
two options: number one, take all the
money and invest it now for long-term
goals like retirement; or option two,
use the money to pay off their mortgage,
then invest whatever's left over and
take the money that would have gone to
their monthly mortgage payment and invest
that as a recurring automated transfer.
I mentioned that this couple has been
aggressively paying off their mortgage,
so even though they are less than ten
years into a thirty-year mortgage,
they're actually on track to pay
it off in just under sixteen years.
And since they have about sixteen
years left on their mortgage if
they just continue doing what
they've been doing, I decided that
it makes sense to use a twenty-year
time horizon for our projections.
And for good measure, I threw in a
Goldilocks door number three: what
if they paid off half the mortgage
now, invested the rest, and then
directed the extra money towards
investments when the mortgage is paid
off in about six point two years?
Before we go any further, I want to
take a minute to acknowledge how much
this couple is already doing right.
They're adding a little extra money
to their mortgage payment each
month, which doesn't seem like much
at first, but actually saves tons
of money and shaves months or even
years off the life of the loan.
And they're thinking about how they
can put extra money to work for
them rather than thinking about what
could they buy or whether they could
move into a bigger house or whatever
else you might do with that money.
Longtime listeners of this
podcast will remember my four
foundational money recommendations:
number one, spend a little
less than you want to;
number two, save a little
more than you have been;
number three, pay off debt a
little faster than you need to;
and number four, invest
for the rest of your life.
If you can do those four things,
you can get pretty far in life.
And these clients are already
ticking all four boxes.
So they're in a good spot, and this
question of what to do with extra
money is a good problem to have.
But anyway, back to our case study.
Their current mortgage has a 5.5
annual percentage rate or APR, which
is the interest they pay on the loan.
That's fairly high compared to where
interest rates were even just five
years ago, so the interest expense
is definitely on their minds.
And their current investment mix is
about 90% stocks and 10% bonds, which
historically returns around 9.1%
annually.
Now, that doesn't mean that their
investments will return 9.1%
every year, but, since we're looking
at projections over 20 years, that
should be a long enough timeline to see
the investment markets behave more or
less in line with historical averages.
I took the information from their
existing mortgage and typical average
annual returns based on their investment
mix, and then used that information to
calculate what would happen over the next
20 years in each of those three scenarios.
So again, we're looking at option one,
invest the full amount now and continue
paying off the mortgage as normal; option
two, pay off the mortgage now, invest
the rest, and then invest the money
that would have gone to the mortgage
each month; and option three, pay
off half the mortgage now, invest the
rest, then direct the monthly mortgage
payments towards investments once it is
paid off in about six point two years.
Here's what I found: if we assume that the
money currently going towards the mortgage
each month would be redirected towards
investments once the mortgage is paid off
in every scenario, then investing the full
amount right now was the clear winner.
However, if we assume that investing all
of the money right now means that they
will not make ongoing payments once the
mortgage is paid off, then option three,
in which half of the mortgage is paid
off right away, is the better choice.
And option two, which is paying
the full mortgage right now, never
turned out to be the best choice.
Here's what else I found.
If the average annual
investment returns were 8.6%,
which is about what you'd expect
from an 80% stock, 20% bond mix,
then the results would still hold.
However, at around 7.65%
average annual return, which is
what you might expect from a mix
of 70% stocks/ 30% bonds, all three
options essentially end up the same.
What that tells me is there is some room
to be less aggressive with the investment
mix or for the average annual returns to
come in slightly below the expected rate.
But if either of those drift
too far in the wrong direction,
then there is no clear winner.
Now, as I said, over a twenty-year
time period, I would expect the
average returns to be roughly in
line with historical averages.
So I'm not super worried
about that part of it.
But these projections assume that you
maintain an aggressive growth-focused
investment mix over the next two decades.
I believe that this couple can do
that, but it's worth considering
your own risk tolerance when making
this kind of decision for yourself.
Because if you are a more
cautious investor, the conclusions
of this case study might not
translate to your situation.
Another thing to note is that even when
there was a clear winner in terms of
which option works out best based on
projecting the data we have twenty years
into the future, the difference between
the best option and the second-best option
was only about two point five percent.
That extra two point five percent ends
up being a decent amount of money, and I
don't want to dismiss it, But I also want
to acknowledge that choosing the second
best option isn't a bad alternative.
Both options are good and, depending
on how you feel about debt, it might
be worth giving up that extra 2.5%
upside in favor of paying off the
mortgage in a little over six years.
So to recap, this couple will
receive a large one-time windfall.
We compared what would happen if they
invested it all right away, if they
paid off their mortgage and invested
the rest, and if they paid off half
the mortgage and invested the rest.
We also looked at what would happen if the
monthly mortgage payment was redirected
towards investments once the mortgage was
paid off in all scenarios, or just the
scenarios where it gets paid off early.
And the numbers suggest that, based on
a 20-year timeline and their current
investment mix, the top two options were
either investing it all right away or
paying off half the mortgage right away.
But paying off the whole mortgage
came in third in every scenario.
I hope this example has been helpful for
you, because, even if it doesn't directly
translate to your situation, I think it
at least tells you the kinds of things
you should be taking into consideration
if you're thinking about whether to pay
off your mortgage early or if you have
a large amount of money and want to make
sure you're putting it to the best use.
And of course, it's also
important to consider the
emotional side of the decision.
The numbers are important, but how
you feel also needs to be factored in.
If you have a question about
what to do with your own money,
please feel free to reach out.
You can send me an email at
podcast@iselerfinancial.com,
or use the form at
iselerfinancial.com/podcast
to submit a question.
That's it for today.
Next week I'll be talking with
tattoo artist Serena Lander.
I've known Serena for around
25 years and she has given me
many tattoos during that time.
Not only was it great to catch up with
her, but Serena was really forthcoming
about both the challenges and the upsides
of a career as an independent artist.
So I hope you'll tune in next
week for my conversation with
tattoo artist Serena Lander.
The Thing We Never Talk
About is for educational and
entertainment purposes only.
It's not legal, investment, or tax advice.
People on the show, including myself,
may have interests for or against
any investments discussed, so do
yourself a favor and don't ever make
any investment decisions based on
what you hear on this or any podcast.
If you like what you hear, please
like and subscribe to this show
wherever you listen to podcasts.
If you have a money or finance question
you'd like answered in a future episode,
please visit iselerfinancial.com/podcast.
and you can get my insights on money And
more delivered directly to your inbox by
subscribing to my Keep It Easy newsletter
at iselerfinancial.com/newsletter.
Thank you so much for listening.
I appreciate you