Reason #4: They follow in lockstep
Q. My 53-year-old boyfriend has recently reduced the amount he's investing in his 401(k), though he still contributes enough to get his company's match and maxes out his IRA. He's started using the extra money to pay off his mortgage early. He lost $12,000 last quarter in his IRA and thinks reducing a mortgage is the safer bet in this market. He argues that I should do the same thing. I'm 55, at least a decade from retirement, and not sure I'll be in my home forever. Should I follow his advice?
A: This is great! I love, love, love that you and your boyfriend are talking openly about finances. No couple can have a truly healthy relationship if they're not discussing money matters. Your boyfriend's strategy makes a lot of sense for his situation, but that doesn't mean you should follow in lockstep. Let me explain.
If you told me your boyfriend had stopped contributing to any retirement accounts, I would be concerned. But in fact he is doing what I recommend: contributing enough at work to get the matching contribution and then funding an IRA. Once those commitments are taken care of, paying off a mortgage can be an incredibly smart retirement move. Think about it: Yes, your boyfriend will have less saved up in his retirement accounts, but he will also have much lower monthly expenses. The trick here is balance. You, on the other hand, seem to be in a different situation.
Given that you're not sure you'll stay in your home once you retire, I see no need to speed up your mortgage payments. Just keep saving as much as you can for your future. You have a long way to go until you stop working, and decades of life after that. Don't get too wound up in what the markets are doing this quarter or this year; stay focused on the need to save for the long term. If in the coming years you decide you do want to stay put in your current home, then you can accelerate your mortgage payments.
Reason #5: They focus on the perfect budget and not the perfect conversation
Q: My fiancé and I combined our bank accounts last year. At the time, he had about $24,000 in debt and I had two credit cards that I typically paid off each month. I make $32,000 a year, and he makes upwards of $55,000. We pay a monthly mortgage (at 8 percent), a car loan ($400), student loans ($200), cable, and utilities. After covering our necessities, we are left with only about $500 a month. How do we set a budget so we can get ahead?
A: You don't need a budget—you need a reality check. Something isn't adding up. Your combined income is $7,250 a month; even in a state with a high income tax rate, your combined take-home pay is probably about $5,000 a month. I'm guessing that your nonmortgage bills eat up $1,100, so that leaves $3,900 for your mortgage and other living costs. You told me the rate on your mortgage but not the monthly cost. Why? Are you in a house you can't afford? At 8 percent, a $400,000 30-year mortgage would run you $3,000 a month—leaving not much money for food.
People with FICO credit scores of 700-plus have been locking in fixed-rate mortgages of no more than 6 percent. The fact that you are paying 8 percent tells me something's wrong somewhere, as does your fiancé's $24,000 in debt. And that's really the issue here, right? You were doing fine until you combined finances, but now your guy's poor money habits are dragging you down.
No budget on earth will work until you and your fiancé have a series of heart-to-hearts about your finances.
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