In the first part of Bob or Jim? we looked at the similarities between the two neighbors. Then we saw how their goals differed slightly. Bob wanted to pay of his house as quickly as possible and Jim wanted to save money instead. Finally, we looked at it from the bank’s perspective and said which would the bank prefer.
In Bob or Jim Part II we looked more closely at the numbers. We wanted to see how far apart Bob and Jim would be today. It turns out not very far apart. They only differed by about $12,500 on a balance sheet. The big difference was the ability to access their money and the control they had over it.
Now it’s time for the future. To recap Bob and Jim both bought their houses at the age of 35 in 19997. They then refinanced in 2003 to lower their interest rates. We also learned that today, Bob would have about $80,000 left to pay on his mortgage. Jim would still owe $193,000 on his mortgage, except that Jim would have about $100,500 in his side account so this would leave his balance sheet at -$92,500. Not a huge difference but definitely a difference.
On his current pace, Bob is set to pay off his mortgage in full in 2013. After that point he might feel a little bit behind with this savings. However, he could begin to put aside the $1423 mortgage payment plus the extra $580 he was paying. So he should be able to save a total of $2,003 per month. That’s $24,036 per year. That won’t really fit into an IRA or maybe even a 401k, of course hopefully the limits have gone up a lot by then though right?
Then there is Jim. Jim who refinanced in 2003 isn’t set to pay his mortgage off until 2033. However, we do need to look a the side account. In 2013, when Bob is set to finish paying off his mortgage, Jim will have about $164,000 in his side account. He will owe about $172,000 left on his mortgage. Not quite in the positive yet, within the next year that crossover will happen. So doing things Jim’s way will result in paying your mortgage off about 6 months later than Bob. Not too bad huh?
We’re still left with the almighty question, where will they both be in 2033? Jim will have just paid off his mortgage but we need to look at his side account. His side account will have approximately $815,144. So where will Bob be? Using the same side account as Jim, Bob will have approximately $754,183. So the second to last time I’ll ask, who would you rather be, Bob or Jim?
Don’t forget scenario B already. Jim took out the extra $100,000 during his refi. Let’s see where this would put him. Jim will then have approximately $828,411. So you see it leaves him in a little better situation. Then we take into account more accessible cash, flexibility and what else? Oh yeah, more interest payments. Wait you don’t want to pay more interest? Well the numbers say you are better off paying more interest and we haven’t even talked about any deductions on your taxes you might get from paying more interest. So we haven’t even accounted for more money in your pocket. Last time I’ll ask I swear. Who would you rather be Bob or Jim? We both know it’s not all about the math so I can’t wait to read your responses.
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WOW! I think that’s really interesting. We always hear that we should get rid of debt as fast as possible, but flexibility is probably the most important thing.
Being stuck is horrible, but having options really makes things easier mentally. And financially, too, as you showed.
My situation is that I have student loans. I just graduated college and have about $1,500 at 6.8% and $23,000 at 3.5%. So once I pay off the 6.8%, does it make more sense for me to invest that money and make minimum payments on the student loans? I guess so. This seems like the best time to invest, and my returns will surely beat 3.5% over the next few years.
What do you think, should I retain my flexibility and invest for a few years? Or should I pay off that debt aggressively and have little in savings in 3 years?
I’ll definitely be passing this on.
What are your thoughts on investing in the short term (1-3 years)? Keep it in CDs and savings accounts? If I’m going to have this money left over, what should I be doing with it? Don’t worry, you’re not my only source of information..
Hello from Russia!
Can I quote a post in your blog with the link to you?
Thank you Daniel. You don’t know how much I appreciate your comment. I started this blog to get people thinking about their finances rather than just accepting the way people say things are or should be. Because of you I know I’ve done that today. I don’t know pretend to know enough about your situation to make a recommendation. I’m not Suze, but you are definitely on the right track with paying off the 6.8% loan. If I were you I would definitely consider focusing on flexibility in regards to your lower rate student loan. Don’t forget that student loan interest can be tax deductible. Just as a side not, I don’t mention investing in this post as I’m not a proponent of putting money at the risk of losing it. If you have more questions feel free to ask away.
I usually recommend high yield savings accounts over CDs because with CDs you have to wait until maturity date and there are fees/penalties for early access. That being said, there are a new bread of CDs starting to become popular that don’t have these fees and penalties so they can be a good option if you make sure to understand what you are getting. Another thing to keep in mind is your tax bracket. If you have $10,000 or more in savings/CDs you might be paying a $100 or more dollars out of pocket to get your 2% rate of return. I wrote an old post about it http://evolutionofwealth.com/2009/08/05/compounding-interest-compounding-burden/
Of course. Thank you for quoting and I really appreciate the link back.