Thursday, February 14, 2008

Your Nest is NOT a Nest Egg

I came across this excellent article on Yahoo Finance titled "Why Your Nest is Not Your Nest Egg". The author writes very clearly and gives convincing reasons and examples. It's worth a read.

Our house has appreciated nicely since we bought it. But a house has a tendency to be costly to maintain, as the article points out, and there's bills like that annual property tax bill.

Some people like Dave Ramsey advocate the strategy of paying off your mortgate quickly. I don't agree with that. First, paying the mortgage off may be possible in some states where houses are under $200K, but it is certainly not possible here in California. Second, I think it is not a wise move to rush and pay off the mortgage, while skipping investing in equities and saving for retirement. Ask yourself, what would happen if you lose your job? What good is it having all your money is in your paid off house? You probably have many monthly bills like gas, water, and food. Are you going to sell off your house to pay those bills?

I think a good compromise is to get a 30 year fixed mortgage, not a 15 year. A 30 year loan gives you a lower monthly payment. So you can have money left over for savings, investing, and for building an emergency fund. If you are married and both are working, and have an emergency fund, then you can afford to pay more principal on the 30 year plan. But if you hit a bad year and maybe one spouse is unemployed for a few months, then it's better to have the lower 30 year payment than a 15 year payment. Don't be in a rush to pay off the mortgage, but remember to think about what would happen if Murphy's Law hits.

My strategy is to invest money in the stock market too, and not just put all my money in paying off my home. I have a fixed amount of income every month, and I allocate it to savings, investments, mortgage, charity, spending, and fun.

Who knows how the housing market or the stock market will perform in the next year, 5 year or 10years? It is not wise to bet everything on real estate. It is wise indeed to put your money in different baskets like stocks and real estate, either property or REITs. That way if there is a crash in the housing market, I still have money in other baskets like stocks, and bonds.

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