15 Year Mortgage or 30 Year Mortgage

I favor 15-year amortization over 30-year amortization schedules.

I recently paid the 48th payment on my 180 payment mortgage. In other words, I’m 4 years into a 15-year mortgage. I paid a total of $26,685.87 in interest over the last 4 years and paid $55,039.17 of principle (from $231,600 to $176,560.83). Although I paid a small amount of approximately $75.00 extra each month, I think this shows the great benefit of a 15-year mortgage.

If I had a 30-year mortgage, the required monthly payment would have been lower, but I would only have paid $21,919.29 of principle (from $231,600 to $209,680.71) and $33,175.35 would have gone to interest. This assumes the 30-year mortgage would have a 0.5% higher interest rate, which is fairly typical.

Some might argue that had I taken the lower payment (i.e 30 Year) and invested the difference, I would have a greater net gain than the 15 year. This might be true since the market has done fairly well between August 2015, and August 2019. Assuming the difference in payment of $554.80 over 48 payments, that immediately nets $26,630.40.  Further, that money was invested systematically in the market and the S&P has gone from approximately 2000 to 2900 or a 45% total gain. I presume that a more exacting calculation could be performed but the gain on your monthly investments would be much smaller since you only started with $554.80. Ultimately, this ignores the reality that most people simply lack the disciple to do such investing.

The first few years in a 30-year mortgage are painful since most of your payment will go to interest. The first payment in a 15-year mortgage amortization schedule is much more favorable. There are several google sheets amortization schedules that you can manipulate to figure out what works best for you.

Two Simple Steps to Start Running

Running provides a very inexpensive way to burn calories and exercise. Personally, running reduces stress and clears my mind. So, although running may not offer a direct financial benefit running can help you stay in shape and provides psychological benefits.

1. Conquer the First Step

On a cold dark morning, the first step out of the door (or maybe bed) is the hardest. More times than not, simply walking out the door for a run is 75% of the battle. If you can get up and out, you are likely going to get your run in. So, when you’re not feeling it – simply just go for a walk. After about half a mile, your blood will be pumping and you’ll probably want to run. Imagine that.

2. Start Slow

If you are a beginning runner, set a very basic goal. Do not set a goal to run a 6 minute mile average in a 5k. No, your goal should be to enjoy getting out and relaxing on a short and easy run/walk. You can push yourself later.

Read — “Born to Run” by Chris McDougal. Although the book starts a little slow, you will put the book down and strap on your running shoes.

There is not much else more satisfying than knowing that you’ve got your run in for the day.

Simplify Retirement Savings Accounts America

American’s tax advantaged retirement accounts (i.e. the 401k and IRA) are unnecessarily complicated and unfair. As Washington debates tax reform, here is one potential method to simplify retirement savings accounts.

Generally, there are two primary retirement savings accounts, the IRA (for Individual Retirement Account) and the 401k (and its variations like 457/403b). As of 2017, an IRA has a $5,500 contribution limit and 401k’s have an $18,000 contribution limit.

All Americans (with earned income) can establish an Individual Retirement Account or “IRA”. However, not all Americans have access to a 401k because, among other reasons, they can be expensive for employers to establish and administer. A 401k can only be established by your employer and only about half of all employees have access to a 401k plan. This results in an unfair and inequitable system. Employees with access to a 401k are permitted to save $18,000 per year annually in a tax advantaged manner in addition to the $5,500 IRA contribution. An employee without access to a 401k may only contribute $5,500 to an IRA. In sum, an individual with access to a 401k can utilize tax advantage retirement accounts on up to $23,500 of income per year but an individual without access to a 401k can only defer taxes on $5,500 of income. This is not good policy and should be fixed.

    Costs Matter.

Not only is availability of the 401k unfair, most 401k plans offer lousy investment options at considerable higher costs than what is available on the market in an IRA. Generally, an IRA allows for the purchase of any publicly traded stock, mutual fund, ETF, or index fund. However, a 401k will only allow investment in those mutual funds and index funds selected by your employer, likely as suggested by the 401k plan vendor. However, the cost of most actual 401k investments greatly exceeds a similar investment option available on the market particularly for small businesses. A simple S&P 500 passive index fund in a 401k likely costs 1.0% or more annually. This means that more than 1% of the entire amount invested is siphoned off by the administrator (not your employer) to manage the account. However, a similar S&P 500 index fund with an 0.05% annual expense ratio is available on the market and could be purchased in a Super IRA. Such fund has 1/20th of the cost of the same investment available in most 401k plans. The 401k’s restricted and expensive investment options are a primary factor in most personal finance professionals suggestion that an employee roll their 401k into an IRA upon leaving employment.

    A Better Way.

It does not have to be this way. Why not let current employees effectively roll over their current 401k to an IRA? This would allow those that like their 401k plan to keep their 401k plan and others to simply roll their 401k funds to an IRA each year. Better yet, why not remove this burden from the employer entirely and allow employees to establish a Super IRA with a combined contribution limit of $23,500. This ends the current unfair contribution limits and allows all employees regardless of employer to contribute the same amount to a tax advantaged retirement account. A single retirement account with the same contributions limits and rule promotes efficiency, simplicity, and fairness – which ultimately encourages adoption and retirement savings.

Of course there are some potential issue that will require resolution, like employer contributions subject to vesting and allowing payroll deductions. However, employers’ accounts could simply be segregated subject to the employer’s applicable vesting schedule and many employers already transmit employee’s 401k contributions electronically. The employee could simply submit a form to the employer along with his/her W-4 that directs the 401k withholding amount to the employee’s broker of choice (with ACH routing instructions, etc.). The funds could then be held in a money market account in name of employee subject to employee’s selection of specific investments through broker. The Super IRA could allow a portion of contributions to be ROTH contributions, which seems to be of some interest in Congress to provide short term revenue. (Roth IRA/401k contributions are made after taxes in the current year but grow on a tax free basis. This produces tax revenue in the short term as compared to a traditional IRA or 401k. Contributions to a traditional IRA or 401k are made prior to taxes but are taxed as income upon withdrawal.)

Undoubtedly, there may be other potential issues here, but we can do better than the current system. Although other issues may be more pressing, we should not continue the current unfair system where an employee with a 401k retirement plan can contribute about three time more to tax advantaged retirement accounts than an employee without a 401k.

Let’s revitalize retirement savings.

Financial Yin&Yang


Cash Flow and Balance Sheet

Cash flow and the balance sheet are the ultimate yin and yang in the personal finance world.  Positive cash flow (e.g. spending less than you make) leads to building a better balance sheet, which consequently leads to more free cash flow.

For example, if have a $10,000 monthly employment income and $8000 in monthly expenses, the $2000 of positive cash flow will increase your asset base over time.  Eventually, this cash can be used to pay off debt (eliminating a monthly payment) or acquire an asset that produces income.  This further increases cash flow, which further builds capital assets, which further increase cash flow.

Negative cash flow reduces your asset base and increases debt, which further constrains your cash flow.  You can increase cash flow or the gap between income and expenses by either growing your income or cutting expenses.  Paying off debt or acquiring an income producing asset, each evidenced by an increase in net worth or equity on your balance sheet, will increase cash flow.  Most broke people do not understand this and the majority of people that actually understand this do not have the willpower to act on it.

Our system rewards capital.  Since we know that cash flow leads to assets, which leads to greater cash flow.   Our goal is to discuss ways to boostrap our balance sheet asset base and create positive cash flow and rinse/repeat.

We want to encourage and motivate you to achieve extreme positive cash flow and to build a better balance sheet.

Welcome to DollarPolicy.com

Welcome to dollarpolicy.com

We want to help you develop and implement your own dollarpolicy to grow your income, give generously, spend wisely, and ultimately build wealth.  Although the focus is personal finance, Dollarpolicy.com is not just another personal finance website.  We want to help you become better informed and knowledgeable about governmental policies, especially those policies that affect your dollars.

Many people never intentionally develop or implement a dollarpolicy or a personal finance strategy.  These people wander through life living paycheck to paycheck, wondering where their money went and looking to the government for assistance or believing that winning the lottery is the only way to become wealthy.  There is nothing inherently wrong with playing the lottery for entertainment or the government providing a backstop for those nearing poverty.  This reliance on government is unfortunate because the lottery is certainly not the best path to prosperity and many governmental assistance programs are unsustainably funded and breed dependency.  Nonetheless, there are many things that these people get right in life – like understanding the value of hard work.  However, not having a policy is, in fact, a policy. And an intentional course of action to spend less and save more, key themes of Dollarpolicy.com, could help these people escape this vicious cycle and build wealth on a much sustainable and widespread rate.

Similarly, many people do not think critically about governmental policy or they passively support their favorite party’s candidate without really considering the effect of such candidate’s (and parties’) policy positions.  It seems that a large faction simply votes for the candidate that “looks good” or who would be more fun to drink a beer with.  Many people cannot describe the difference between federal, state, and local government…much less Medicare and Medicaid.  Ultimately, a basic understanding of governmental policies is critically important for the sustainability and growth of our country.  We need more reasoned policy discourse among voters.

In addition to helping people escape debt and build wealth, Dollarpolicy.com will provide a balanced, reasonable, moderate, and fair analysis and commentary of government policies related to personal finance and beyond.  We hope to facilitate open discussion about dollarpolicies without the toxic environment of the political world.

Think about it…our government has many dollarpolicies throughout the tax code and beyond.  For example, the government enacts policies intended to promote affordable housing, college education, healthcare, and retirement savings.  Many governmental policies are intended for good but are unsustainable, executed poorly, disincentive personal responsibility and work, and result in unintended consequences.

Ultimately, the goal of Dollarpolicy.com is to help individuals build wealth and become more informed voters.  Whether you are just starting out or whether you have a healthy income and/or a high net worth and no matter your prior understanding of governmental tax policy, for example,  you will find valuable information and motivation here to reach the next step in your journey to build wealth and become a better, more informed voter.