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2020 was a crazy year. We saw a lot of uncertainty, a stock market roller coaster and many financial disasters. 

We all hope 2021 will be better – both for our social lives and our finances. Many people have set lofty goals like paying off their mortgage early, finally investing to grow their wealth or simply spend less. 

As always, putting your plan into action is a lot harder than imagining the future you want to live in. In this episode, you’ll find out how to reach your financial goals in 2021 and what options you have to grow your wealth (even if the market tanks again). 

Want to make 2021 your wallet’s favorite year? Listen now!

Show highlights include:

  • Why financial decisions shouldn’t be based only on math (and why emotions should play a role as well). (2:02)
  • Why owning your home can feel good, but threaten your wealth-building. (3:05)
  • How a mortgage can keep you from losing your home in a financial crisis. (5:35)
  • A secure way to build your wealth without locking up your money for decades. (10:36)

Remember to download Grandma’s Top Tips for an Independent Financial Future by dropping into https://grandmaswealthwisdom.com/free/. It's time for YOU to break through to a smart, stable, financial future.

If you’d like to see how Grandma’s timeless wealth strategies can work in your life, schedule your free 15-minute coffee chat with us by visiting www.grandmaswealthwisdom.com/call … just like Grandma would want us to do.

Read Full Transcript

A hearty welcome to “Grandma’s Wealth Wisdom” with your neighborly hosts, Brandon and Amanda Neely. This is the only podcast that helps you take charge of your cash flow and leverage your assets, simply and sustainably, the way Grandma used to.

Amanda: Hi. I'm Amanda, and welcome to our Grandma's Wealth Wisdom, where we help you break through to a smart, stable financial future with the tried and true wisdom Grandma used.

Brandon: And I'm Brandon, and this is Episode 73, where we're asking the question, should you pay off your mortgage early or invest in 2021? The common thought here is I should pay off my mortgage early, so that as soon as possible, I have the mortgage payment for whatever else I need each month and not have it due to the bank every month. Plus, if something ever happens, they can't take away my home if I own it outright, of course. [01:07.8]

Amanda: Today, we're asking, what does the Grandma have to say about this? Yes, it's a little complicated or maybe a lot complicated, but we want to dig into that complication. Does Grandma's wisdom to pay off her mortgage early apply to today's world?

A little bit of history. In 1920, the average interest rate on a mortgage was 6.2%. In 1940, it was 5.5%, and historically speaking, we're super lucky to have interest rates on mortgages around 3% as of this recording,
Brandon: Some of the gurus out there want you to believe all debt is bad, but is it? Do we do the math or do we just want to pay off our mortgage early? Because that's what we feel everyone else is trying to do. [02:02.2]

Amanda: Now we do want to acknowledge that it's not just a math thing. It is a psychological thing, too. We have to make our decision based on both math and emotions.

Brandon: Most importantly, don't keep this simple. You'll make your best decision when you sit with the complexity for just a little while. If you'll sit with us through this episode and then give yourself some time to think, discuss it, feel your feelings, run the numbers for yourself, we believe you can make a great decision that you'll feel good about for years to come.

Amanda: Now, we want to start with two stories to give you some examples of people who have made decisions and how those decisions are played out for them.

First, I'm going to tell you a story of a woman who got divorced and with the divorce, she got the home, she got the mortgage and she got a settlement of cash kind of payout and she decided to use that cash to pay off her mortgage so that she would own the home free and clear. That felt really good to her to not have to pay the bank every single month a mortgage payment. [03:14.0]

Now, turns out that was shortly before the Great Recession hit. The real estate market plunged. She lost her job, and to make matters worse, if they couldn't get any worse, she became disabled.

Brandon: That sucks.

Amanda: Here she is, jobless, disabled and desperately needing money. Yet all her money is locked up in the walls of her home and the bank isn't going to do a cash-out refinance of her mortgage while she doesn't have a job and low prospects of getting a job.

Brandon: Now, imagine all the people who were in a similar scenario in March or April 2020. They’ve just paid off their mortgage and they're celebrating, and then they lose their job or their business shuts down and they have no clue what they're going to do. I wonder, if at that point, they'd rather have the cash than a paid-off mortgage. [04:12.8]

Amanda: Yeah, and I know we got a letter in May or June that was saying we could defer our mortgage payment if we needed to, whereas the aid that might be needed to meet the demands of life, we didn't get any letters about those.

Another example we saw far too often when we lived on the South Side of Chicago really impacted senior citizens the most. A lot of people were like, I want to have my home paid off by the time I reach retirement, and a lot of them did that. Sometimes their house had been in their family for multiple generations and it's still been paid off. They felt really secure.

But then property taxes would go up and continue to go up year after year and they would get behind on paying those taxes, so then the government would come in and say, We're going to put your home up for auction to pay those back taxes and you need to find somewhere else to live. [05:03.3]

Brandon: Imagine that scenario with someone who's just as behind with paying their property taxes, but they also have a mortgage to the bank. What will the bank do if the state tries to put the home up for auction to get the taxes owed to the state?

The bank is going to come in and say something like, You’d better make enough from that auction to pay for the mortgage loan outstanding. Likely the state isn't going to move forward with the auction because they won't make enough to pay the bank and the taxes owed. It's one of the few times you can get a bank on your side.

Amanda: And, yes, property taxes often go up. We just got to notice this month that ours is going up by over $100 per month in the midst of a pandemic, but really, honestly, we don't know what's going to happen in the future with mortgage interest rates or property taxes, with home values, all these things. [06:05.4]

I mean, if we look historically, home values have only barely kept up with inflation, and if the Great Recession taught us anything, it taught us that home values don't always go up, so we can't really count on home values keeping up with inflation.

Brandon: Plus real estate is local, so you don't know what is going to happen to your local area. Maybe a source of many local jobs goes away and property values go down because no one can find a job there anymore. Maybe a natural disaster hits and no one buys there for a while. Maybe there's a lot of foreclosures due to high unemployment during a pandemic, so mortgage interest rates skyrocket after the pandemic is over. Who knows what could happen? [06:56.2]

Grandma always said, “Eat your vegetables. Look both ways before crossing the road. And never risk your financial future on elements of the market you can’t control.” That Grandma, always good for some tried-and-true advice. And although some of her wisdom seems to have skipped a generation, you don't have to be left behind.

Download “Grandma's Top Tips for an Independent Financial Future” absolutely free, when you visit Grandma’sWealthWisdom.com. Don't wait. Get Grandma's best tips today.

Brandon: So, what's the alternative? If you're not going to pay off your mortgage early, what do you do with the extra money?

Amanda: Let's review some numbers, and Brandon, make sure these numbers are really clear. Have me repeat anything if I go too fast. Let's say you've got a $240,000 mortgage right now. You’ve just bought your home. You have got 4% interest on that mortgage. You've got your monthly payment, just to principal and interest of $1,145.80, and over the 30-year loan, you look at the amortization schedule you get and you realize you're going to end up paying $172,000 plus in interest. [08:16.2]

Brandon: That’s a lot of interest.

Amanda: That’s a lot of interest. You look at your budget, you find you've got $500 extra that you could put towards your mortgage, so you run the numbers. If you add the $500 per month, each and every month, to your loan payment, you end up saving $83,000 and some change in interest and you pay off your mortgage in 17 years. That sounds really appealing, right? Who wouldn't want to save $80,000 in interest going to a bank and who wouldn't want to be free of a mortgage within 17 years?

But to give that the benefit of the doubt, you run a couple other sets of numbers. You take the historic returns of the S&P 500 and you ask, What if I invested $500 per month each and every month? [09:06.3]

Now, quick disclaimer: we're not telling you that you should invest, but we were playing with some math to see what could happen if you did, and of course, historic returns have no prediction of future returns, but it's the best we can do to calculate.

You use the real S&P 500 returns and you add a 1% cost because no one's going to manage that money for you absolutely for free, and you put that $500 each and every month over 30 years and you discovered that could turn into $323,000 and some change.

But then you realize you're going to owe taxes on the growth, so you factor in a 24% tax rate, which that's what it currently is. It could be way more in 30 years, but you're going to go with the numbers you know. You put that in and you find, after paying the taxes on that growth, you'd only have about 290,000, 289,000 and some change. [10:02.0]

But when you compare that with putting the $500 per month on your loan and the interest that you save, you realize it's still over $200,000 more than the interest you saved paying your mortgage down early. That sounds really good.

So, you're like, Okay, I'm doing some good things here, but maybe there's a third alternative. What else? Where else could I put this $500? I mean, I've been listening to Brandon and Amanda Neely on the Grandma's Wealth Wisdom podcast talk about this thing they call Grandma's Strategy. Wonder what that $500 a month would do there.

You reach out to us. We pull the numbers for you to find $500 a month going into a dividend-paying, high-cash-value whole life insurance policy, using the structure that a Bank on Yourself professional would use.
Under that scenario, you could have 288,000 with the ability to avoid any taxes under current law and a death benefit of over 600,000 should something happen to you. You’ll also know you can access your cash whenever you need, without having to worry about selling stocks and the market flow. Plus, the growth is not subject to the stock market ups and downs. You're taking less risk. [11:16.6]

You put these numbers side by side with each other, and if you're keeping track at home, you’ll see paying off your mortgage early could save you $80,000 while locking up the cash in the walls of your home. Investing could yield $290,000 after tax, but it locks up your cash because as the experts say, you want to invest for the long term.

Then, third, saving in a Bank on Yourself designed policy yields a little less than the investing turning 88,000, but gives you access to your cash whenever you want or need it, including you could still pay off your mortgage early if you wanted to.

Brandon: And also I think the other factor is let's again say a pandemic happens. You have access to that cash if you need it. [12:06.7]

Amanda: Right, and you're not selling stocks when the market is low because of a pandemic or, I don’t know, whatever happens.

Brandon: So, when—not if—an emergency happens, which situation would you rather be in? Again, I said “when”, not “if” an emergency happens. We all think that emergencies won't happen to us, but, again, look back on your history. I bet you've had a few in your life.

Back to the examples. Number one, have your money. Have your home paid off, but unable to buy groceries and basic necessity.

Amanda: Yeah, you’ve got to remember banks aren't going to let you get the cash out of the walls of your home via a cash-out refinance of your mortgage when you're unemployed.

Brandon: Yeah, so in that emergency, you're in a pickle there, as Grandma would say. Number two, you owing money to a bank but getting some wiggle room on your payments in case of an emergency. That's another scenario. [13:09.0]

Amanda: Yeah, and remember banks want to get paid. They don't want you to have to put your home up for an auction in a personal or global economic downturn and only get the principal or maybe even less back. They want you to keep your mortgage that they'll give you some reprieve and be on your side often.

Brandon: And, number three, having the cash you need to make your mortgage payments, buy groceries or whatever else you want or need when you want or need it.

Amanda: Yeah, this third scenario is about keeping all your options open while not worrying about whatever might come.

Brandon: Our bottom line here, in 2021, it's not either pay off your mortgage or invest. There's actually a third option. Save. Savings is different from investing. You've heard us say that many times here. [14:00.0]

What if you kept a big pile of funds available and growing in case you need it to pay off your mortgage payments, buy groceries or take advantage of an opportunity, not just emergencies but growth opportunities? What if it grew by more than your mortgage interest rates? Wouldn't you want to know about that?

Amanda: Yeah, more than just a simple emergency fund, we're talking about a financial foundation of accessible cash you can leverage when you need it or want it. That's actually what we specialize in here at Grandma's Wealth Wisdom. We help people build the foundation they want to be set for their entire lives, whatever the future holds, without taking unnecessary risk.

And guess what? People leverage their policies to go do a whole bunch of things that end up making them a lot more money in both the policy and on whatever they're doing that that far outweighs the returns that we saw in the S&P 500, which is one of my favorite things, too, so that you can have your money doing two things for you at once. [15:11.0]

But we want to let you know, if you're ready to get a portion of your money off the risk roller coaster, if you're ready to sleep well at night, then we're ready to chat. Visit Grandma'sWealthWisdom.com to find out more.

Brandon: Speaking of risks, join us next time for how the stock market really works. It might not work how you think it does. In fact, it could all be one big setup for you to lose.

Amanda: Mic drop.

Brandon: That's a hard one right now, right? Because everybody seems to be winning.

Amanda: Yep, so we're going to dig into it next episode. Until next time, keep building your wealth, simply and sustainably, so you can break through to a smart, stable financial future. [15:57.0]

The topics presented in this podcast are for general information only and not for the purpose of providing legal, accounting or investment advice. On such matters, please consult a professional who knows your specific situation.

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