Pay Off Debt or Invest Interview 2 (The Graying Saver)

The Cabin Mortgage Payoff

Editor: I’d like to introduce you to The Graying Saver. He’s chasing financial independence (FI) and early retirement as well. BUT he’s not willing to give up his beautiful looking North Carolina cabin (a second home) in order to do so. There’s still a mortgage on this property and he has to decide between using his extra savings to pay down the mortgage or invest.

I think you will appreciate his story. 

TGS and son hiking
TGS and son hiking

Tell us about the yourself.

My wife and I are in our mid-40’s and have one son who is 12. We live in Raleigh, NC and also own a cabin in the NC mountains. We’ve been on the path to FIRE since August of 2016.

How much debt did you start with and how did you accumulate it?

Once we discovered the concept of FIRE (Financially Independent; Retire Early) we realized that the mortgage on our cabin was the one thing really standing in the way of making quick progress towards our goals. At the time the balance on the cabin was $157k. In February of 2017 we set a goal of trying to pay the cabin off in 5 years or less.

Did you have one or multiple sources of debt?

The cabin was the main source. No car loans, no credit card, no student loans. We have a mortgage on our primary home but we aren’t in a rush to pay that off.

What was the interest rate?

I think the original interest rate on the cabin mortgage was around 4.25%.

Did you look into refinancing or consolidating the loans?

When we decided we wanted to try and pay off the cabin early the first thing we did was refinance the loan.

If so, what was the result and why?

We were able to refinance the loan to a 20 year mortgage at a rate of 3.87%. Our monthly payment increased by $9 and we only needed to bring something like $600 to closing, which was mainly to cover the appraisal fees. We used a company called Aim Loan for the refinance – our 2nd with them – and I can’t recommend them enough. Everything was done online and they presented us with several loan options. Another key outcome of refinancing with AIM was that they have online loan servicing, which makes it very easy to make additional payments whenever we can. With our original lender we would’ve had to write and mail additional checks each time we wanted to make an additional payment. That would’ve been very inconvenient and something of a hurdle to get over each time.

How much did you have available monthly to use for debt or investments?

This varies somewhat, but it’s typically between $1k and $2.5k.

What investment(s) did you consider when you evaluated your debt/invest decision?

We had opened up a taxable investment account just prior to deciding to payoff the cabin. The plan with that account was to throw extra income there at the end of each month.

What type of account(s) would the investments be held?

We were putting money into a taxable account with Vanguard in a low-fee index fund.

Why a taxable account? Are you maxing out all available retirement plans?

I have a 403(b) and my wife has a 401(K) and neither of us are maxing these out, but both of these are our supplemental retirement accounts. We also each have other retirement plans through our employers. Mine is a defined contribution and my wife’s is a defined benefit, i.e. a pension.

If you are not maxing out your retirement accounts, why would you put additional savings in a taxable account?

We were putting some money in a taxable account because we were concerned about having enough funds to span the 5-7 year period between when we hope to retire and when we can access funds in the 403(b) and 401(k) – when we turn 59.5. Does that make sense? I’ve since learned a little more about Roth conversion ladders but I’m no expert there and haven’t looked at that option as closely as I will over the next couple years.

Once the cabin is paid off we’ll be investing the excess cash flow, but we’ll need to reassess our situation at that time and see what type of investment(s) makes the most sense.

Did you consider the tax deductibility of interest or the tax burden on investments in your decision?

Not really. The mortgage interest paid on the cabin is obviously tax deductible (for now) but that benefit wasn’t a key factor in our decision making.

Did you choose to pay off debt, invest or some combination of the two?

The Graying Saver Pay Off Debt or Invest
We decided that we would try to pay off the cabin mortgage and continue to contribute to retirement plans through our employers. In fact we both received small raises in July and we simply increased our retirement account contributions by the amount of the raises.

What were the three key factors drove this decision?

  1. Even if we chose to invest additional income instead of using it to pay off the cabin we would still have to make that cabin mortgage payment every month. So by applying additional principal to the cabin mortgage each month it’s kind of like we’re leveraging that payment we’re having to make anyway. We’re rapidly getting to the point where more of the regular mortgage payment is going towards principal instead of interest and escrow.
  2. Using an online investment calculator I determined that based on our retirement account balances and our contribution rates that we would likely hit or exceed our invested assets target of $1M by the time my wife can retire with the maximum available pension from her employer – in about 8 years. So even with taking on the new goal of paying off the cabin we are still on track to reach our other financial goals.
  3. We could’ve continued to invest our additional income instead of applying it to the cabin mortgage and after 5 years we may have had more than enough to pay off the cabin, but 5 years is not a very long time horizon when thinking about investing in stocks. To me this approach smacked a bit of trying to be a market timer, which is not a game I’m willing to play. Over a 5 year time period I was much more comfortable with trying to pay off the cabin mortgage directly instead of trying to pay it off through stock market gains.

If you chose to pay off debt, did you give up a 401(k) match or similar “free money” opportunity to accomplish your goal?

We did not give up any match or similar “free money” and even if we had the opportunity to do so I would not have taken that approach. Free money is free money and I think it would be crazy to not take advantage of that kind of opportunity. Our employers contribute a set percentage of income to our retirement plans. There’s no way for us to change that percentage up or down.

What has kept you motivated to accomplish this long term goal?

The best thing I’ve found for staying motivated to accomplish all of our financial goals is to make monthly charts and to tape them up on my bathroom mirror so I see them every day. I picked up this practice from reading “Your Money or Your Life” and it has been a huge help to sustaining our progress. The charts remind me not only of where we are currently on the path to our goals, but more importantly where we’ve been and how far we’ve come. I have a chart for invested assets, net worth, monthly income vs. expenses, and cabin payoff. I wrote about making these charts in a post on the 10 mostly non-financial things I’ve done over the last year to increase my happiness.

The Graying Saver's Cabin
The Graying Saver’s Cabin

Where are you now with your payoff plan?

We are 10 months into our 5-year (or less) plan to pay off the cabin and so far we’ve brought the balance down by more than 20%, so we’re slightly ahead of schedule. I track this on my blog as well here.

Looking back, would you do anything differently?

We bought our mountain property in 2007. 10 years ago. I sometimes wish I’d known then what I know now about the possibility of achieving financial independence and retiring early. If we had started down the path to FIRE then we’d be there by now. But I didn’t know such a thing existed then and owning a cabin had always been a dream. It is now a dream that has come true. I like to remind myself that we only ever live in the present. I then ask myself if I am presently happy, and the answer is an unequivocal yes.

What is your next financial related goal?

Once the cabin is paid off we plan to save and invest the funds we were applying to the cabin mortgage in the hopes that we’ll be able to reach financial independence even quicker than planned. Here’s hoping (and planning) for the best.

TGS and son canoeing
TGS and son canoeing

Is there anything else you want to add to this story that I did not ask?

Just want to add my thanks for the opportunity to share a little bit about our debt vs. investing decisions. Much appreciated!

Editor: Big thanks to The Graying Saver for sharing his story. As you read in the first pay off debt or invest interview here, I choose to pay the minimum on my mortgage and invest the difference. That move is right for me. The Graying Saver is in a different place. He’s 8 years from a pension and focused on eliminating the monthly payment from his mortgage. While we make different choices, the beauty is that each of our decisions work for us. Remember that personal finance is personal and everybody’s circumstances are different.

To read more about his journey, check out his site The Graying Saver.

Do you choose to pay off debt or invest with your savings?

19 thoughts on “Pay Off Debt or Invest Interview 2 (The Graying Saver)”

  1. I think the most important thing is that you actually have a plan in place. Whether or not the details are perfect, if it works for you, that’s the important element. Some people have no plan, no direction, and no motivation to acquire information.
    I paid off my home mortgage and there are many controversial opinions on a complete at-down, but it worked for me. I have some taxable accounts and separate DRIP accounts that may be costing me a few extra dollars, but it works for me.
    The important thing is that I feed the different buckets on a consistent basis.

  2. Exactly. It’s our plan and it’s working for us. Housing is the biggest unsolved piece of our FIRE puzzle. Do we keep both places, do we sell one and keep the other, which one, or do we sell both and move somewhere completely different? I don’t know. But we don’t have to make that decision right now. But if one place is paid off by the time we’re ready to tackle that decision then I think we’ll have more options and more flexibility. Along the way all the other buckets are being fed – nobody’s going hungry.

  3. The pictures of NC, the cabin and outdoors are beautiful. The cabin looks like one my wife and I rented for a week on vacation about 10 years ago. Loved the area. On a different note, I am debt averse and like to pay down debt before investing in riskier assets. Tom

    1. DM – yep, once you take lifestyle inflation by the hand it’s hard to say goodbye.

      You’re right – we have made tons of great memories up there. The trade off is that it’s pushed our FIRE date further out. Of course I had never heard of FIRE when we bought the property in 2007. The decision to pay it off as quickly as possible has helped me make peace with myself over past decisions.

  4. Thanks for featuring Brian’s story, Jason!

    Brian, I think you made the right decision to get rid of debt at this point, especially since you can count on pension income. I’m curious though, why did you choose to pay off your cabin as opposed making extra payments or paying off your primary home?

  5. First, the cabin is freakin’ gorgeous. Second, by the time you’re 50, you’ll have a paid-off cabin, a million dollar portfolio, and a pension that will probably cover two-thirds of your annual living expenses. Seems to me that you’re kicking-ass, TGS. Very well played, my friend.

  6. Just to be clear – my wife will receive a smallish pension when she retires at age 54. But I’m thinking of that income as our safety margin. Most of our retirement income will come from 403b, 401k, and my State retirement, which is actually a defined contribution plan. Even though my wife and I are both employees of the same State we have different retirement plans.

    A long-winded answer to your question about why pay off the cabin vs. pay off primary home mortgage:

    Even before discovering the concept of FIRE we were always more frugal than the average American household. We had also always been contributing at some level to our retirement plans. So one advantage for us, if you can call it that, of discovering FIRE later in life is that we already had some momentum behind us once we got on board the FI train. Once on board we made several small tweaks to our lifestyle/financial decisions and suddenly we’re cruising along at a good clip.

    The more I looked at our situation the more I realized that the only thing preventing us from full steam ahead was the cabin mortgage, which was significantly less than our primary home mortgage. Paying it off felt more do-able I suppose? We sort of used the debt-snowball approach where you pay off smaller debts first and then use the the money you were paying on smaller debts to put toward larger debts. But for us it was a matter of reducing a lot of smaller expenses to the point where we had some excess cash flow each month that we could throw at the cabin mortgage.

    1. The above was in response to Mrs. Groovy and then Mr. Groovy chimes in. Awesome!

      I composed the above and then was rudely interrupted by back to back meetings.

      Thank you Mr. Groovy – we do enjoy the cabin, have to admit.

      You paint a picture that is perhaps more rosy than reality, but I’ll take it. How do I know it won’t all be true by the time I’m 50? I’m not there yet.

      Good luck on your journey to realizing Groovy Ranch.

  7. That cabin looks AWESOME!

    I think you are well on your way towards FIRE, because you have the most important ingredient…An actual PLAN. It is impossible to build your wealth to the point needed to be financial independent without a plan, and strict savings habits towards that plan.

    It also looks like it will be paid off before the 5 year goal, so kudos to you and your family!

    1. Thanks Sean!

      I think all of us in the FI community get so used to discussing our financial plans and goals with others in the community that we can forget that so many others don’t have a plan and many don’t have a clue.

      I was talking to a friend a few months ago who told me he has no idea where his money goes each month. My father’s wife recently told me that not long ago my father had $25,000 in credit card debt. Ugh.

      So yeah, it feels good to have a plan.

  8. We invest a fixed amount in index funds, and everything else goes to paying off the mortgage. Currently we are making the payments we would have made in 2030 if we didn’t do that. If the markets don’t do anything drastic, we will reach FI at the same time as our mortgage is paid off.

    1. Andrew – very good question. We went down that path when we were trying to figure out how the cabin fit in with our plans for FI.

      I go into that decision making process in some detail in this post:

      We ultimately decided against renting it out due to the road up to the cabin and the fact that we are four hours away and wouldn’t be able to easily help renters if something was needed. Some people have no problem with the road whereas it has caused others paralyzing fear.

      Once we decided to aim for paying off the cabin and refinancing we were stuck with the decision not to rent. In order to get the best rate on the refi we had to attest that it was a 2nd home and not an investment property. If we rent it out now we will be in violation of that attestation and could be charged with mortgage fraud.

      Once it’s paid off we’ll probably revisit the Airbnb option.

  9. I don’t have many debts that I am interested in paying off, especially at the sacrificing of investing. I lean towards investing over the debts I have currently because all of them are such low interest rates and I am so far from away from reaching financial independence that being debt free is not a major concern of mine. Furthermore, my two debts that I currently have are property debts (mortgage, car) and I if I needed/chose I would look to unload the assets as neither of them are major parts of my life.

    Great interview! Who’s next?

  10. I can really related to this post. For years we went back and forth between paying off the mortgage and investing. We finally made the decision to pay off the mortgage in 2016 and with additional focus have made great progress. Good luck!

    1. Yep, I still go back and forth from time. But the fact that we’ve made a lot of progress towards paying off the cabin in our first year helps me ignore those doubting voices in my head. I remind myself to review our progress and just stick with the plan. A five year plan seems like a long time when you’re in the first year, but I know it’s not really that long and we’re already ahead of schedule.

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