Paying off your mortgage is no small feat. Most people take 30 years or more to do it, and if you’ve done it before then, well, congratulations—you’re way ahead of the game.
So now what?
Many people fret about their mortgage so much that they can’t even imagine what they’d do after it’s paid off. But your financial life doesn’t end when your mortgage does; there are still many financial goals to consider: kids’ education, retirement, starting your own business, paying for future healthcare, getting another car, and so on. Where do we go from here?
Step 1: An Emergency Fund
The first step, if you haven’t done it already, is to set up an emergency fund. Most financial advisors recommend a fund of 6 months’ expenses in a highly liquid asset, such as a savings account or short-term U.S. Treasuries. We at Capitalist Review recommend having a full year’s worth of expenses in liquid assets.
Why so much? The 6-month emergency fund is a very old financial chestnut that doesn’t apply in the modern world. As US News reported a year ago, “you might be surprised by how the job market and typical hiring processes have changed in the last five to 10 years.” The fact is: 2008 destroyed the labor market. Real wages are actually down since then, and the interview process has stretched on and on. If you want to read about just how bad it can be, the New York Times writes in detail about how some employers are using a six-interview process.
Simply put, 6 months isn’t enough anymore. Have a year’s worth of expenses at the ready, and you’ll be more in control of your life if you ever lose your job.
Step 2: Pay Down Other Debts
It should go without saying, but being debt-free is even better than being mortgage-free. If you still have a car loan, student loans, personal loans, or credit card debts, pay those off now.
When choosing how to pay off your debts, there are two approaches. Some like to pay off the smallest debts first, to get the feeling of accomplishment of having paid something off. Others focus on the highest interest rate, trying to save as much money on interest payments as possible.
We like to pay off small debts first, because that frees up monthly income that would go to paying a number of debts sooner, which can then be applied to other debts. Also, don’t underestimate the psychological boost you get from paying something off. That can make the chore of giving creditors money a lot easier.
Step 3: Identify Future Goals
With debts paid off and a 1-year emergency fund in place, you’re now financially secure enough for the next step, and it’s a metaphysical one. You need to ask yourself what exactly are your goals in life—what do you want to do with your money?
It’s amazing how few people ask themselves this. Many go through the motions of working, buying stuff, paying off debts, and waiting for retirement without asking themselves if this is exactly the lifestyle they want.
Do you want something different? Do you want to start your own business? Do you want to go traveling for 5 years? Do you want to start your own business? Do you want your children to go to university?
Money is a tool that people use to do stuff. That is often overlooked in the desperate consumerist cycle where people just buy because products are shoved in their faces and all of their friends, families, and neighbors are buying the same stuff. Take a moment to step back, think about what you want to buy, and why you want to buy it. Make a list, understand what is motivating all of those purchases and life decisions.
Most importantly, be confident that you are using your money on things that will enrich your life and make you happier—not just on stuff you think you should have or you just want to have for reasons you can’t explain.
Step 4: Max Out Tax-Advantaged Accounts
When you’ve identified your life goals, the next step is easy: invest in tax-advantaged accounts.
Want to retire early? Max out your IRA and 401k. Make sure you understand the benefits and limitations of these accounts—you may want to talk to your accountant or a tax professional.
Want to give your children the best education money can buy? Look into a 529 plan and be clear it’s right for you.
Worried about future medical costs? Get an HSA and look into an FSA as well.
When you’ve identified the tax-advantaged accounts that fit your goals, max them out. Then you’re ready to dump cash into other accounts with one goal in mind: investing.
Step 5: Invest, Invest, Invest
When you’re investing both in and out of tax-advantaged accounts, you need to look for high risk-adjusted returns. Compound interest is your friend and, as they say in finance, it is the most powerful thing in the universe.
There are many investment options for different types of investors. We are fond of Lending Club, but there are many others. If you want tax-free income producing investments, municipal bonds and U.S. Treasuries are what you want. If you want aggressive growth, the stock market is what you’re looking for. If you want high income right now, there are a variety of investments that can give you that.
The key here is to get in the game. As legendary stockbroker Charles Schwab once told his daughter, “just participate in the market.”