093 Should You Make An Extra Mortgage Payment Or Should You Invest Your Extra Cash?

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Hey there. Welcome back to this episode of the affluent Entrepreneur Show. This one's a little different. This one is a little unique because I don't know, some of you may know this already because you follow me that I do a weekly about a weekly live broadcast on my Instagram @melabraham9, where I'm bringing people on or I'm answering questions about money, about wealth, around business, even life. But really it's about us moving you forward on the path to financial freedom. It's to build that affluent lifestyle. And so I do this thing called money mentoring over coffee on Instagram live. Like I said weekly and I thought about it. I said, gosh, there's some valuable questions in there that I think would help the broader audience even if you couldn't make it live, which I hope you do one time. And so what we decided to do is to release portions of that live broadcast as episodes of the affluent Entrepreneur show. And so this episode of the affluent Entrepreneur show is me answering those questions from my live broadcast of money mentoring over coffee. Enjoy it. And if you have questions that come up, if things come up, you can do what these folks do. If you can't join me live, then just submit your question@askmelnow.com and we'll make sure that we get it answered for you. All right. The whole idea is here to have real saves, same conversations that are real about money, about your path to financial freedom, because after all, it's your birthright. All right, Enjoy the episode. I'll see you soon.

Good morning. Good morning. Good morning. Welcome to this episode of Money Mentoring. Over coffee. I got my. I got my coffee here with my Budo mug. Well, it's an oat milk latte, so.

I wanted to jump in. I'm jumping in a little early because I want to talk about the market. I want to talk about what's going on. So as you're jumping in, let me know, say hello.

I'm jumping in. Just start. We're just starting just a touch early, but here's the deal. I wanted to jump in here to just talk about the economy and the market and then answer your questions. So I've got some questions in the hopper that people have sent in, but if you have questions, let me know and I'll bring you on live, or I'll answer the questions here and. And we'll make it happen. This whole session, Money Mentoring, is just about you and I and us having a sane, safe conversation around money, around wealth, around that journey of the path to affluence, the path to financial freedom. What you need to do, I got nothing to sell you as far as investments or insurance or anything like that. I'm just here to try and guide you and give you a pathway to financial freedom, which I honestly believe, to the core of my being, that it's your birthright. And so let's. Let's make it happen and. And do that. So. But the first thing I wanted to touch on before we get to some of the questions is this. We got some new economic data this morning. The CPI came out. It showed that we had a slight decrease in inflation. Good morning, beauty and health. 10:10. It showed that we had a slight decrease in inflation overall. So it went from 9.1 to 8.5, but our core inflation stayed about the same. So what does that mean? Well, the market is going crazy right now. As I'm looking at the market right now over here, Dow Jones is up 500 points, you know, one and a half percent. The NASDAQ is up 2 2.3% S&P is almost 1.8%. So things are moving. But does it mean that. That we're done? And I gotta tell you, unfortunately, I don't think that this inflation battle is done. Even though we saw a minor decrease. I think we're all feeling it still at the pumps, at the grocery store, at all of that. And so until we get that brought down, I don't think that we're completely out of the woods yet. So we need to be smart about our money, we need to be smart about our investing. We need look at it through those eyes. I don't want us to be panicked. I don't want us to be freaked out. What I want us to be is equipped, informed, educated, and empowered to make proper financial decisions. As we start to move through the rest of this, you know, does it mean they have control of over inflation? Maybe. I don't know. They're not going to do anything again until August, September. September, I think it is. And I think that we're seeing slowdowns in companies, potential layoffs, hiring freezes, those things that we can't ignore. And so even though we got good data, it doesn't mean that we can sit back and relax and say we're good. I think that we need to use the principles, sound financial principles, sound wealth principles, and still navigate this, because those principles work whether we're sitting in an environment of inflation or no inflation. And so that's the thing that I think we need to look at from, from, from doing that. So I want to get to some questions and see and I'll stay on for a little while. I do have another. I have a keynote that I got to do later today that I got to get ready for. I'm doing a fair amount of speaking today, tomorrow, and, and beyond. So, so I think that those things are going on. I wanted to just kind of lay that groundwork. If you look at what has, is transpiring, I think that you'll see that we're not out of the woods yet. And that's okay. That's okay. We just need to navigate it. We need to do the things right. So let me get to some questions. These are questions that came in on the question hotline. As, as I'm, I'm looking, looking at the questions. So if you don't know, you can send me questions to askmelnow.com I'll bring them up, I'll put them, put them on. We'll get them answered on, on these shows. If not, you have questions here, bring them to me. Let's, let's get them answered here. And if I need to, we can bring you up and I can coach you and, and help you out any way possible. But let me pull the questions up and we'll go from there. Here's the questions. Let's just look at this. So the first question I have that, that comes in is about this idea of rebalancing. First off, they said, what is rebalancing? And so here's what happens is that when you're in a portfolio, we do an asset allocation, we diversify the portfolio. So you loan some large companies, some small companies, some international company, you'll have that. And there's a mix. And the mix is based upon your risk profile and your risk tolerance and your risk capacity. So what ends up happening is, is us really starting to look at how your risk is now over time. If the market's going up or the market's going down, what you're going to see is that the percentages that you originally allocated get skewed. So all of a sudden you, if you were 70% in stocks, all of a sudden because the market increased in value, you're 80% in stocks or more. And so what we want to do is rebalance the portfolio on a regular basis so we can balance the risk that we're taking on in the portfolio. What we don't want to do is hyper rebalance. In other words, I don't want you rebalancing your portfolio every month. So I look at rebalancing at least two times a year, usually at the midpoint and just before the year end. I want to rebalance based on my, my risk profile, my risk tolerance, and, and my circumstances. The other thing to consider is this, is that when we get towards the end of the year, many of These mutual funds, ETFs, index funds, don't do it as much, but many of the mutual funds will rebalance their portfolios. And what that does is it triggers gains, taxable gains on you. Some of you may have seen that in 2021, where all of a sudden they, you got these 1099 that show these huge gains on these funds that you might have owned. And you're saying, oh my God. And you got this big tax bill that you didn't think about. Sometimes we'll rebalance in November to move yourself away from those gains if, if possible, and, and then go from there. So that's how I would look at it. What we do now, I sit on a pension committee of a company that, that we run a pension plan of, you know, 30 plus million dollars. We set ranges, we set percentage ranges where if our equity percentage goes above a certain percent by a certain percent, we give ourselves room to move because the market goes up and down. And so, so that's what, what we'll do is, is look at your asset allocation, look at the ranges of the allocation. Give yourself the space and time for it to move a little bit. And then Rebalance probably twice a year, at least once a year, based upon your circumstances, your risk profile, your risk capacity and your risk tolerance. I've done, I did a special.

Episode on my show, the Affluent Entrepreneur show, specifically about risk and how to understand risk capacity and risk tolerance and how they all interact. So if you want to go deeper on that, this is a great question. So, all right, next question that came in was, I have a mortgage. I have a mortgage and the rate is 2.8%. I have a savings account. So they must be in a high yield savings account because it's 1.25% which is around where there are. They have a 0% loan on a automobile, they're saving 20% in their Roth 401K. They have extra cash. So they're asking me, do I put that extra cash towards, towards paying down the mortgage or stick it into savings and investing or pay off the car. So here's my thinking now is a 2.8% mortgage loan. You're not going to get that anywhere, so leave that alone. I don't know your age, so age will come into this. If you're 50s, mid-50s and above, you know, and, and everything, maybe we want to get that mortgage off your back at some point. But if you're young, say you're in your 30s and you have a mortgage at 2.8%, the ability to create wealth starting from your 30s, I'd rather you be investing the money now versus worrying about paying down a 2.8% mortgage that you're going to get a tax deduction for. If you get a 30% tax deduction on that mortgage, the effective rate on it is like 2%. So it's, it's almost free money. So leave the mortgage alone. Now let's just talk about the savings and let's talk about the car loan. Though you've got a car loan, albeit it may be a 0% loan. I don't think they give anything for free. So somehow they got paid and it is buried in the price or something. But you've got a debt on a depreciating asset. If I've got debt on a depreciating asset, there's a tendency that at some point during that life the debt is more than the value of the asset. So I would be really leery and careful about that and potentially try to get myself out of that loan. And then lastly, let's talk about the savings rate, depending on your age and depending what you have. So we follow something called the wealth priority ladder. And One of the things to consider is this is first off, making sure that you have what we call a peace of mind fund. Some people will call it an emergency fund, but I want to make sure that you have the liquidity to sustain yourself during these times, during uncertainty, during unplanned things, to make sure that you're covered. And too often we don't. So I don't want everything invested. So I'm going to presume that you have something in place that covers you from a liquidity standpoint. Second, you are saving 20% into a 401k. Your maximum on the 401k is going to be $20,000. So if you're making 100,000, you're maxing out the 401k. The extra cash would either have to go into a brokerage account or into a Roth IRA or a regular IRA to do that. To do that, I would like to see your savings rate in the mid-20s. Now, if you are up higher in age, then I'm going to push you to 30%, depending on what kind of nest egg you have. So there are some nuances here, depending on your age, depending on your situation, but I think that by and large, leave the mortgage alone. Let's get you out of that car loan at some point in the near future. Let's increase our, our investing in our rate of savings. If we can't, if we're maxed out on the 401k, then move it into an IRA or a Roth IRA or a brokerage account. Hopefully that helps. Awesome. All right, so let's look at the next one we. This one is, if I want to invest, I want to invest in real estate, but I don't want to have the responsibility of real estate. Okay. This is kind of like me. I, I like investing in real estate, but I don't want to get the calls at 11 o' clock at night saying, hey, the toilet's clogged. If the toilet's clock, go get a plunger. Don't call me at 11 o' clock at night. I don't want to be that landlord that has to deal with that stuff. And so it said, I want to invest in real estate investments. REITs, real estate investment trust. These are, this is like a mutual fund for real estate. So someone puts these things together, they buy bunches of properties and, and they trade it like a stock. Now REITs have some very specific tax benefits and tax rules for the REIT if they're operated effectively. And so, so it says, can I do that? Invest in REITs, in my Roth IRA or my IRA, or does it need to be in a regular brokerage account? So the answer to that is that no, okay, it can be in. In a retire in your Roth ira, assuming that they'll allow those.

Investments. You just gotta look at where it's housed, if you will. And so, yeah, you can do it that way. And because REITs will pay off dividends, you'll get these dividend distributions that are taxable. If it's in a Roth IRA or in an ira, you're not going to pay tax on it. At least if it's a Roth ira, you'll never. You're not going to pay tax on it at all. If it's in an ira, you won't pay tax on it until you draw it out at retirement. So great question. Mark that one down. Oh, God, I like this one. So I'm healthy, I'm single, in my mid-20s. I have a good job. Should I buy life insurance or disability insurance? Someone was telling me to buy life insurance or disability insurance. All right, so insurance companies. Let me get really clear about what insurance companies do. And some insurance people are not going to like what I have to say. Their primary goal, an insurance company's primary goal is to collect the premiums, okay? They just want to get paid. Their second goal is to find an exclusion so they don't have to pay you out. Their third goal is, okay, we'll pay you out. That's the way they run. Okay? So they're not in this for your best interest, necessarily. So I'm not one that wants to give insurance companies any money that you don't need to do. But having said that, I think there's some things to really consider when you start looking at insurance. And one is this idea of what happens in a situation where you are the primary wage earner right now. You're single, you're mid-20s, you're in prime health. Hopefully. All those things that you get a chance to do, you start to say, well, okay, should I get insurance? Well, I actually think that one of the most important insurances, especially when we're young and we're the wage earner, is disability insurance. I've had the disability policy in place for many, many years, for decades. And in fact, so what happens? The likelihood of death versus disability for you is much lower. You know, especially if you live an active lifestyle, disability insurance is a really good investment, especially if you're the primary wage earner now, you don't have people depending on you. Because you said you're single but you're depending on you. If you get disabled and you can't work, what do you do? That's the beauty behind the disability policy. So when I herniated the, when I had my bike accident and I was out with a grade four concussion and that type of thing, I had a disability policy. I still do. Same policy. They wrote me well into a six figures, a six figure check so I could just focus on healing and getting better. When I herniated three discs in my back before that, in the 90s, same thing. I think that a disability policy is something you ought to look at. That's one. Life insurance. As a young single person, I don't know if you need it because no one's depending on your income. No one's depending on that income. The reason we get life insurance is to replace income. So the people that are depending on it have the ability to take care of themselves when God forbid you might be gone. Now having said that, one of the beautiful things about life insurance at a young age is one, you're insurable because typically you're in good health and two, it's really cheap. You're going to, you know, for very little cost you can get a million dollar policy and keep your insurability. Let me give you a for instance, June of 2019, as you know, I got diagnosed with cancer. They found a 5 centimeter tumor, turned out to be 7 and a half centimeter tumor in my bladder. At that moment, at that moment I became what's called uninsurable. So the policies that I had in place before being diagnosed.

Are still enforced. They cannot take them away from me because I was insurable at the time that I got it. But if I had no insurance and then I now I try to go and get insurance, they say, wait a second, you've had cancer within the last two and two years? Almost two and a half years. Clear. But still I've had cancer in the recent past. We're not going to insure you. So one of the things to do is at some point you might look at getting life insurance as term insurance because it's really cheap to ensure your insurability. Okay, hopefully that makes sense. And so. But I would not get sold into whole life investment grade, that kind of stuff. The reason you're getting insurance is for the insurance. If I'm going to make investments, especially at a young age, if I'm going to make investments, I will make more money.

Investing on my own than trying to do it through an insurance policy where they're gouging me with fees, commissions, and expenses for the first five to seven years of a whole life policy. Okay. I know that probably irritated a whole lot of insurance people, but I don't care. All right? I'm here for you. All right, so that's, that's the scoop on insurance. But I would look at disability and, and I would look at term insurance to insurance your ability. But you're single, you start to get, you get into a relationship, you get spouse, children, different game. Life insurance needs to be there to protect your family. Okay.

All right, let's see what happens here. Let's go to any other questions. If there's questions in the comment box, drop them in the comment box. Or say, I have a question. We'll bring you on live and we'll make that happen. All right, so let's just take a look. Okay. This kind of goes back to the mortgage. If I have extra cash, should I make an extra mortgage payment or should I invest it? And they said, this couple, both of them are 32 years of age, their mortgage rate is about, it looks like 2.55, if I can read that correctly. Again, 2.5% mortgage rate. I would be 32 years old. Invest the money. I wouldn't put it against the mortgage. That is free money. You can't get 2 1/2% mortgage rates anymore. Right now. Put the money away. Get it in an index fund, get in an etf, get it working for you, assuming you have the liquidity and a peace of mind fund to make sure that it takes care of any emerg or any unplanned things. Awesome. All right, so here's the deal. I'm gonna, I'm gonna, I hope that you found this of value. If you found this of value, let me know. We're gonna keep doing this. I love doing this. I love helping you. I love having the conversations. And like I said, I, I, I look at this and say, y', all, y', all your birthright, y' all, this. I'm a Californian, born and raised, and I'm saying y', all, and financial freedom is your birthright. Let's go claim it. I want to help. I want to give you the path. I want to be the place where you can ask the questions. There's no crazy, stupid, embarrassing questions. If you have the question, someone else has a question. If you have a question. I probably had the question at one point. I probably screwed it up at one point. Learn the hard way. I don't want you screwing it up. I don't want you to learn the hard way. Let me help you out. Let's move you down that path. All right? So I hope that this was valuable for you. Love to hear from you. Keep in touch with me and we'll do another one of these money mentoring. We'll do another one. You guys have an incredible, incredible day. And anything comes up, hit me up in the DMs, send me a note. Let's make it happen. Cheers. Thank you for being a part of the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join the affluent entrepreneur facebook group@melabraham.com group and I'll see you there. Cheers. Bye.

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