Tanner is calling because he and his wife are going down to one income once his wife has their baby. They have $520,000 in cash. What should he do with this money?
QUESTION: Tanner in Los Angeles is calling because he and his wife are going down to one income once his wife has their baby. They own a house on a 30-year fixed and owe $330,000 on the loan. They also have $520,000 in cash. Tanner isn’t doing a 401(k) right now. What should he do with this money?
ANSWER: You’ve done a great job. No one can argue with the results on the short term. You’ve done an unusually good job. You make an unusually great income. You guys are obviously bright people.
There are two types of fear. There is fear that’s valid. Don’t stand in the middle of the interstate because trucks hurt. Don’t touch a hot stove because it’ll burn you. That’s good fear. Then there’s fear that we always say is false evidence appearing real. What you’ve got to think about on stuff like the stock market is if the stock market is made up of America’s biggest and brightest and best companies, if all of their values became zero, you would lose all of your money. If all of those companies’ values become zero, you’ve got other problems because your house is not going to be worth anything, and your bank will have closed a long time before then. And the FDIC that’s protecting your money—partially because you have too much in there—is going to have collapsed. Probably the government is going to collapse, and we will see a new government form.
If you were in the stock market in a decent mutual fund, in the last two years, one year we made 11% and another year we made 26%. That’s 2009 and 2010. My rate of return was 37% over the last two years, which is an average of 18% for the two years. That’s not going to be normal because we were coming up from an unusual drop. But it was a great time to own mutual funds, I’ll tell you that. You missed that. Is it going to do that again? Someday. Is it going to do that next year? I don’t know.
Mutual funds and real estate are long-term investments. If I woke up in your shoes, what would I do? I’d start fully funding that 401(k) as hard as I could. It’s not that much anyway. You can only put about $18,000 a year in there, and $1,500 a month in your world isn’t anything. And I’d pay off my house tomorrow. If your home was paid for, would you borrow on it to get more cash? It’s the same thing if you don’t pay it off.
You’ve done so well, and the piling up of cash has been an ultra-conservative move on your part. Paying off the home is an ultra-conservative move. You’re going to have a different feeling with your wife at home with a baby and a paid- for house, a year’s expenses in the bank, and funding a 401(k)—that’s more secure than you feel today. You really can’t anticipate it until you do it.
I would begin to slowly invest as you learn enough about investing—in mutual funds only—to get comfortable. You need to go slowly. I personally have a great comfort level because I’ve been studying it and doing it for years. I want you to learn enough to where you’re comfortable, because that’s where the false evidence appearing real becomes not a valid fear because you start to understand what the stock market looks like over a 30-year period of time. You’re 32. What’s it going to look like if it averages in the next 40 years what it did in the last 40? If it does half of that, what’s it going to look like? What causes it to do those things? Begin to understand a little bit of those things, and then as you feel comfortable, put a little in there and ride it. But don’t put so much in there that you lie awake at night.
Take your time. Paying off the house is a no-brainer. If you decide you don’t like being debt-free, you can go get a mortgage later. You’ve got this huge potential. You could literally be worth $30 million or $40 million at retirement if you continue to earn like you’re earning and you continue to have a conservative lifestyle.