Conventional wisdom to building wealth is to get a mortgage, buy a house, save some money, and retire in your 60’s with your colleagues. However, not all of us are willing to follow the norm. Some of us, like many readers of this blog, want to buck the trend and achieve financial independence a little earlier.
Paying off a Mortgage
While many people want financial independence, the real question is if they are willing to do what it takes to make it happen. Are you willing to set goals and work towards what you want despite the chance of failure? Are you willing to ensure that your monthly expenses are significantly less than your monthly income? Are you willing to be different than your peers? Will you do what it takes to pay off all your debt as fast as possible, including your mortgage?
A number of Million Dollar Journey readers have done just that, they have achieved the big goal of paying off all their debt including their mortgage. Some at a very young age. I think that paying off debt first is a smart thing to do, even in a low interest rate environment. Sure your mortgage rate may only be 3% or less, but it’s still an after-tax return. Not only that, paying off a large debt, like a mortgage, will add a lot of cash flow to your finances on a monthly basis and give you a big psychological boost.
After paying off the mortgage, the most common question I get is “now what?” It’s a satisfying question for me to answer because now that you’ve hit this huge financial milestone, it’s time to move up and onward.
Lets start with what not to do. I think the biggest mistake after achieving debt freedom is to assume the battle is over and increase your lifestyle to replace your debt payments. I’ve seen this happen first hand, and it’s almost painful to watch. This is particularly detrimental for those who have forgone investing for many years in favour of paying off debt. Don’t get me wrong, I think celebrating a big achievement is a requirement, but upgrading vehicles may not be the best financial move.
If you are serious about financial independence, then you need to put that extra cash flow into appreciating assets. To some, this may be income producing real estate, others it may be small business, to me, it’s mostly investing in the public stock market by building a diversified portfolio. In fact, because of the low barriers of entry and relative simplicity, I think that everyone should have at least a portion of their nest egg in the broad market.
Keep Investing Simple
When I say “the market”, I’m not talking about picking the hot stock that your co-worker has been raving about. Although “hot” stocks may be fun to follow, building a long-term, diversified, and relatively low risk portfolio is what you are after. I’ve written this many times before, but over the long term (think 20-30 years), the broad stock market only goes up. Even the great Warren Buffet considers indexing a no-risk way to invest over the long term. The key is to stick with a proven strategy through the ups and (especially) downs – and trust me, there will be ups and downs.
For me, I have a portion of our portfolios indexed, but a large portion is invested in a variety of dividend stocks. Why dividend stocks? Since I’m planning on living off my portfolio a little earlier than tradition (in my 40’s), I’m interested in buying income producing assets. Owning companies with a long track record of paying dividends is one way to do that. Even better still, I’m overweight on companies that have a long history of dividend increases.
If I were just starting my investing journey today with no mortgage payment, I would start off with a simple index based portfolio with regular monthly contributions to replace the old payments.
- If you want to stick with bank mutual funds, here are their index based funds sorted by bank.
- If you want to go the self-directed route, first open a low cost discount brokerage account, then pick low cost index ETFs that cover the world markets. Here are some sample ETF portfolios.
You may want to go deeper still and optimize taxation of your accounts. To keep it simple, it’s best to maximize your tax sheltered accounts first, then move onto non-registered accounts once your tax sheltered accounts are maxed out. More on this on portfolio tax allocation.
I think the biggest message out of this article is to keep building your net worth even after your debt payments are eliminated. It will put you on the fast track to financial freedom.
Have you paid off your mortgage, or soon to? What is your plan with the extra cash flow?