Why I’m Not Alarmed by These Three Common Money Moves

A believer in ‘good enough’ investing explains why these much-maligned financial choices don’t keep her up at night.

CHRISTINE BENZ of Morningstar

People who hand out financial advice for a living often spend plenty of time criticizing certain money decisions. But there are a few commonly questioned moves that, frankly, don’t worry me very much. Here are three of them.

1. Paying off a mortgage ahead of schedule

It’s true that prepaying a mortgage may not offer the best use of capital right now, especially when certificates of deposit and high-yield savings accounts can pay more than some older mortgages. And for younger investors with long time horizons, I generally think most investable assets should be aimed at higher-returning investments such as stocks, rather than being diverted into safety-oriented choices like mortgage paydown or CDs.

Still, I’m relaxed about the idea of someone paying off a mortgage early — or buying a home outright instead of financing it — because that usually isn’t something financially strained people do. There may be exceptions, such as someone making that choice without enough emergency savings or retirement assets. But in most cases, people who eliminate their mortgage already have their finances in order, and a paid-off home is simply a source of comfort they’ve earned. I’ve never met anyone who said that mortgage prepayment prevented them from reaching other major financial goals.

2. Keeping more cash than usual

This is another conservative choice that doesn’t bother me much. Over long periods, cash has lagged behind bonds and especially stocks, and in U.S. market history it has only barely kept ahead of inflation. If a younger investor is holding a large cash balance while having little exposure to long-term assets, particularly stocks, that is usually a bad sign. But more often I see substantial cash positions among people over 50 who already have sizable portfolios and simply value cash for its liquidity, stability, and convenience more than bonds.

I have even made that trade-off myself at times, at least on paper. Yes, those investors may be giving up some return by choosing cash over bonds, and inflation can erode much of the interest cash earns. But the bigger point is that they have chosen safety rather than leaving everything exposed to the stock market. As author Bill Bernstein put it, “If you’ve won the game, stop playing.” If their broader financial plan is sound and they still maintain a solid allocation to stocks for long-term growth, I’m not going to lose sleep over a little extra cash.

3. Choosing traditional tax-deferred contributions instead of Roth, or the other way around

Here, the main thing the investor is getting right is the commitment to save for retirement in the first place. And to be honest, figuring out whether a traditional IRA or 401(k) contribution is better than a Roth contribution is always partly a guess. No one knows whether their tax bracket in retirement will be higher or lower than it is now, and no one can predict how tax rates will change over time.

My approach is to save as much as you reasonably can and make your best estimate about the contribution type. A frustrating reality is that by the time you realize Roth contributions would have been the better choice, it is often too late in life to start using them. I also strongly favor having a mix of traditional tax-deferred, Roth, and taxable accounts during your working years. Then, once retirement begins, you can decide which accounts to draw from in a way that helps manage your tax bill as efficiently as possible.