In this mailbag episode, we answer three different questions:
#1) I don’t feel comfortable with investing and don’t check my investment accounts, but I’m worried I might be missing something or not taking advantage of everything.
#2) I like to spend a little more money and my spouse is a saver and thinks we aren’t saving enough, and we’re trying to find a good compromise. Any tips?
#3) I’m wondering if I should pay ahead on my mortgage or invest that extra money instead? What’s the better use?
If you would like to have your questions answered on the show, please send them to us at firstname.lastname@example.org!
Outline of this episode
- Answer to question #1 [1:37]
- Answer to question #2 [6:45]
- Answer to question #3 [10:26]
Give your investments space to grow but don’t stick your head in the sand.
Our first question today is, "I don’t feel comfortable with investing so I don’t check my investment accounts, but I’m worried I might be missing something or not taking advantage of everything." The emotional and unavoidable aspect of investing is the constant feeling of either trouble ahead or missing out. It's human nature to have emotions tied to investing. It doesn't help that the financial media makes you feel like you should be doing something with your investments in response to headlines or in anticipation of something.
There are two sides to consider with someone who doesn't like following their investments closely. On one side, not getting in your own way can be a positive thing when it comes to your long-term investment returns and how well you do overtime. The way the cycle of emotions often works is that the stock market goes up, we get excited and want to buy more. Then the stock market goes down, fear kicks in, and we want to sell. As a result, the average investor tends to underperform their investments by buying and selling at the wrong time. On the flip side, you don't just want to have your head in the sand and hope for the best. There are certain things that you want to do along the way when managing your investments to help you earn a better investment return. We touch on them in the episode and we have two episodes where we discuss them in detail, so be sure to check those out episodes #5 and #19 (linked below) if you're interested.
Tips to help spenders and savers compromise
Our second question is, "I like to spend a little more money and my spouse is a saver or thinks we aren't saving enough, and we're trying to find a good compromise. Any tips?" This is a classic question, and it's amazing how often there's a difference between two partners in terms of spenders and savers. The first thing we'll say is that everyone is different and there's not necessarily one right or wrong way. Each person has their own views and attitudes toward money, or money scripts as we call them.
Step one is making sure you're both rowing in the same direction with the big picture. We find that even if partners are different when it comes to spending and saving, they often feel the same way about the bigger picture things they want to accomplish. From there, you can take the next step of figuring out what you actually need to be saving each year to reach those goals on the timeline you envision. After that, automate your savings wherever possible, with things like automatic payroll contributions to your employer retirement plans. We call this process reverse budgeting, and episode #22 is dedicated to it.
Pay down debt faster or invest instead?
The final question is, "I'm wondering if I should pay ahead on my mortgage or invest that extra money instead. What's the better use?" This is another common question and it can be expanded beyond mortgages to include all types of debt. When thinking about this question, there are two main factors to consider. One is what's financially optimal, and the other is what's most important to you and helps you sleep best at night.
Looking at this purely from a financial perspective, the question is pretty straightforward. Are you going to earn a better return on your money by paying down debt or investing? Historically investing in the stock market has provided a 10% average annual return, while investing in the bond market has provided a four to 5% annual return. Based on that, over longer periods of time, you would expect to be better off investing in a diversified stock and bond portfolio rather than using the money to pay back low-interest rate debt faster. Of course, there's no guarantee that the future returns from investing in the stock and bond markets will be similar to the past. The punchline is that from a purely financial perspective, the odds are that you can earn more money by investing extra cashflow rather than using it to pay down low-interest-rate debt, like mortgages, and especially with interest rates as low as they are right now.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Podcast Episode #5: The 80:20 Rule of Investing
- Podcast Episode #19: The “Other 20%” of Successful Investing
- Podcast Episode #22: The “Reverse Budget” – an Alternative to Budgeting