When I started the Some Kind of Green project I said I was going to look for alternatives to investing in 401K programs (a.k.a. the stock market). Before I get started, let me say that I think this planet has no future unless there is a global revolution of immense proportions. But since I’m willing to admit that I might be wrong, and since I have a wife and family to think about, I came up with this plan.
How is investing in the stock market “ungreen?” Investing in the stock market gives mega-corporations more money to use for growth and expansion, and expansion means more industry, more trees cut down, more pollution, and so on.
Green Alternative: Make extra mortgage payments. As of Nov. 1st, I have stopped all 401K contributions and set up automatic extra payments on my mortgage. Any money in existing 401K plans will remain there (it’s madness to touch it until those stocks bounce back, and even then, it’s suicidal to consider taking it out before retirement with all of the penalties and such). 401Ks are like roach motels — money checks in but it never checks out.
How is this greener? You can’t live anywhere for free in our society, and I’m not giving up my house, so I have to pay the mortgage. Chase Bank is going to get their money from me one way or the other. But if I pay the mortgage faster, thereby paying less interest, Chase will get less of my money. How much less? Based on my calculations, about $20,000 less. And I intend to spend that $20,000 way, way greener than either Chase Bank or the stock market will. I will also be mortgage free about 7 hears sooner. Here is a link to a mortgage calculator that will show you how much money you can save by making extra mortgage payments.
How is this a smart investment alternative? Although it’s almost impossible to predict the net advantage or disadvantage in this investment strategy due to the unpredictability of the market, it can be approximated. Most predictors seem to use 8% as the long term average rate of return for a 401K. Taking off 2% for fund management fees leaves 6%. My mortgage rate is about 5%, which means that I’m potentially losing 1%. I’m also losing the employer 401K match, but since that’s only .25-on-the-dollar, it’s almost inconsequential.
So let’s say for round figures I’m earning 2% less than I would with a 401K. But am I? Just because 8% average return on a 401K has been true in the past doesn’t mean that it will hold true in the future. Furthermore, I’m aged 50. The stock market could be in the tank for another 5 years or more! By that time I should be stabilizing my 401K investments in bonds anyway. Returns on bonds will be way less than 8%, more like 2%. So basically, by the time the market bounces back, I’ll be too old to take advantage of it. If I was a younger man this decision might have been harder, but as it is, not so much. More money for me and my family and less money to the growth-oriented financial system. Better economically, environmentally, and politically.
Oh yeah — and I also closed my accounts at Suntrust and opened accounts at Virginia Credit Union — another step in the right direction.
Does anybody else have investment and savings alternatives that are greener, more socially forward, or anti-corporate? I’d love to hear them.
Disclaimer: I’m not a licensed financial planner, I’m just a guy trying to pick a life path. Use this information at your own risk.