You Paid Off Your Mortgage. Now What?

A reader asks:

We have been working very hard and I am proud to say we are debt-free. With our mortgage paid off, now we are looking to start investing.  The truth is I really don’t know anything about investing or where to start which is part of why I have put this off.  Can you point me in the right direction?

First of all kudos on paying off the mortgage. That is no easy task. Second of all, it’s not out of the ordinary to put this stuff off when it comes to investing.

Many people become overwhelmed with the prospect of investing.

I have no idea where to begin.

I’ll just start saving later when I’m ready.

Invest?! In this economy?!

Luckily, you already have the hard part out of the way.

Paying off your debt requires planning, foresight, discipline and the ability to delay gratification. Guess what else requires these same exact skills? Saving and investing.

Take that same money you were putting into your mortgage re-payment every month and roll it right into a periodic investment framework. The best thing you can do for your portfolio has nothing to do with stock picks or timing the market and everything to do with how much you save. Paying off debt on a regular basis goes hand-in-hand with saving.

The good news is you have the wherewithal to make financial goals a priority. Now you just have to pass the baton from debt repayment to investing.

Not knowing your specific situation here are some questions you can think about:

Does your employer have a 401(k) plan? If so, great. Put in at least enough to get the company match. A 401(k) plan is convenient, tax-efficient and the best part is the money is taken out of your paycheck before it ever hits your bank account.

No 401(k) plan at work? No problem. It’s easier than ever these days to set up an account at a low-cost fund provider, zero-commission brokerage or robo-advisor. If you’re saving for retirement, an IRA is a simple tax-deferred retirement account that works much like a 401(k), only with more investment options and a lower contribution limit.1

There are tons of low-cost investing platforms available these days — Vanguard, Betterment, Robinhood and Charles Schwab to name a few. Whichever one you choose, make sure to make your contributions automatic. You don’t want to waste valuable mindshare manually sending money every month.

Set it up once, make those contributions automatic in terms of what you invest in and make sure to increase the amount you save over time.

What are you investing for? If you’re investing for retirement you want to take advantage of as many tax-deferrals as possible. If you’re investing for shorter-term goals, make sure you understand your risk profile and time horizon. If you need the money for spending purposes in 3 years or less, investing in the stock market is probably not a safe bet.

What should you invest in? If you want to keep things simple you could do far worse than investing in a target date fund. You simply pick a low-cost target date fund that has a year close to your potential retirement date and instantaneously gain a diversified portfolio that’s managed on your behalf by professional fund managers.

Or you could go the robo-advisor route. Just answer a few questions and they will pick an asset allocation suited to meet your needs and goals.

The best part about these two options is how simple and convenient they are. You make a few decisions upfront, they invest on your behalf and you can move on with your life.

Want to invest in something more exotic? Yes, target date funds and robo-advisors are boring but they are simple, low-cost and require little heavy lifting in terms of maintenance and upkeep. If you can’t stand the thought of investing in such a boring approach just make sure you know what you’re getting yourself into and set reasonable expectations.

You’re not Jim Simons so don’t go into this with the idea that you’re going to knock the cover off the ball with your investments. Good investing should be long-term, boring and mostly hands-off.

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Here are the latest highlights from Animal Spirits this week:
 


 
Now here’s what I’ve been reading lately:

  • With interest rates near record lows, retirement may have to wait (Quartz)
  • How Shazam works (Coding Geek)
  • How your character traits impact your financial decisions (FT)
  • Your home is not an investment (Irrelevant Investor)
  • What to do when you have enough (NY Times)
  • The best investing books for every kind of investor (Dollars and Data)
  • We’re all irrational sometimes (Seth Godin)

12020 contribution limits: $19,500 for 401(k) and $6,000 for an IRA.

 
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