My biggest "ah ha" realization in 13 years as a Financial Planner
I have been a financial planner since 2007 and I’m going to share one of my biggest “ah ha” moments with you.
Once I realized this “ah ha” and start implementing it, the responses I’ve had from clients has been incredible.
Here it is.
Financial questions do not always need financial answers.
To go a bit deeper.
Financial questions, I’ve learned, are best answered in three ways.
Let’s illustrate this by starting with the question that led me to this “ah ha.”
Should I pay off my mortgage early?
BAH (before ah ha), I would launch into a long winded financial answer.
“Well, let’s start with your after tax rate of your mortgage by subtracting your marginal tax rate from one, then multiplying by your mortgage interest rate. If we can do better than that in the market it doesn’t make sense to pay extra on your mortgage. Blah blah blah”
My detailed financial answer was normally met with even more questions.
Let’s look at some of the surrounding questions that are hidden behind the “should I pay off my mortgage early” question.
Would paying off your mortgage early provide you with a better feeling of security?
Were you raised in a family that taught you to pay off your mortgage? (remember your parents mortgages were at much higher rates)
Does debt of any kind stress you out?
Now let’s look at this question, PAH (post ah ha)
Should I pay off my mortgage early?
Let's assume your mortgage rate is 4%.
Your mortgage may be tax deductible if you utilize itemized deductions. If you itemize, your 4% mortgage rate is effectively 3.04%
(1-24% tax rate) multiplied by your 4% mortgage interest rate. (these are assumptions, feel free to use your own numbers)
*consult your tax advisor
In this example, if you itemize your deductions, your after tax rate on your mortgage would be 3.04%. To be conservative though, let's just use your original mortgage rate of 4%.
Financially, I would suggest that you are better off paying off other debts at higher interest rates, or investing excess cash into the stock market since the expected rate of return could be higher than 3.04 - 4%.
*investment returns not guarantee
This answer may be enough for some, but not for others.
Higher Expected Stock Market Returns
Interest Rate on Mortgage
Maybe you saw your parents go through financial hardships. Maybe you’ve been through a period of unemployment. Maybe your parents taught you to hate all forms of debt.
What does paying off your mortgage early really mean to you?
I would suggest that “seeing” yourself debt free prior to retirement could give you much more peace.
Knowing that you could be debt free could make you feel much more comfortable at the thought of how you could weather life's eventual curve balls.
If the thought of debt stresses you out, it’s probably worth exploring the emotional answers to this question further.
Paying extra on debt tends to instill financially responsible habits.
In my experience, the people who have the most financial responsible habits are the happiest and most successful in retirement.
By paying extra on debts you’re ingraining a few things into your habits and mindset.
With time, that extra debt payment becomes "invisible" in a sense and just becomes a regular part of your budget.
That extra payment eventually just becomes part of your monthly cash flow and becomes your new normal.
Think of grabbing a glass of water instead of a soda.
A few carrots instead of chips for a snack.
Over time, when you stack up small changes like these, it leads to dramatic increases in your long term health.
The same happens when you stack up these positive financial habits.
Each of these three ways to answer the question will resonate differently with each individual.
I’ve learned over the years that for many of us, we don’t need to make “perfect” financial decisions.
Retirement planning is ultimately a bunch of educated guesses about what we’re doing currently, rolled together with a bunch of educated guesses about what we’ll be doing 30 years from now.
There’s a lot more flexibility than many of us think when it comes to retirement planning.
I no longer stress about guiding my clients to the “optimal” financial decisions.
I’ve found that if you handle your financial questions based on whichever answer resonates with you the most (financial, emotional or behavioral), you can find much more comfort and peace with your finances.
Finding the financial plan that works for you will give you much better results than making "perfect" financial decisions that are outside of your comfort zone.
If you're convinced that this may be a good idea for you, but don't know how to get started feel free to schedule a phone call. We're happy to help...
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