Eliminating debt is my main FIRE goal

[nun]

I'm a bit worried by the rapid rise in the stock market, I think it's a bit of a bubble, so I'm rebalancing by taking some profits and paying down my principal. I'm actually selling on the way up

 

[brewer12345]

So people keep repeating that they feel so great w/o debt - but their reasons seem to based on economics (lower cash flow requirement, avoid interest payments). So when presented with other economic data, why not consider it? But so many seem to want to ignore it, in favor of....what? That's what I am so curious about.

OK, so you could say "fear of the unknown" (basically my wife's fear of flying). But most of these people invest in stocks and realize that a 100% fixed investment is not "risk free". I can understand no debt and 100% fixed income - even though I don't agree with the approach.

So I just don't get why so many people feel so strongly about paying down a mortgage. I can appreciate doing it or not doing it, that is personal preference. But I can't understand feeling strongly one way or the other. What is the strong emotional driver that overcomes the numbers that usually say "no big deal"?

-ERD50

Thus the fascinating field of behavioral finance exists. Along the same lines, I am a very well edcated and experienced investor who tends to look at my investments/portfolio in a coldly rational light and (mostly) make decisions based on my best analysis rather than emotional factors. Yet I still fall into the common traps noted by behavioral finance (endowment bias, etc), at least until I realize what is happening and step back to reconsider (sometimes unsuccessfully).

So why do people make these types of decisions? I think a lot of it is due to the way our brains evolved over the years: the reflexes and brain architecture that makes survival more likely in primitive conditions does not help in modern finance. FWIW, I have a relatively early payoff of my mortgage in mind (always had a 15 year note, will be done in less than 9 years assuming I don't lump sum it at some point), but I invested from the start and even chose to take out some (cheap, subsidized) student lonas in grad school rather than liquidate assets.

 

[ziggy29]

The question of using cash flow to pay off debt or invest is an age-old question that we'll never see agreement on (in the general case). They really can't be directly compared because one is more of a safe "sure thing" and the other has the potential to be more lucrative over time but carries considerable risk. Each person's own risk tolerance profile and circumstances guide their decision, and in many cases, neither one is more "right" than the other assuming no unusual circumstances. And yet we so often hear people chastising others of the folly of their ways.

All I know is that when jobs are being eliminated or offshored and the market was tanking, knowing I could live on very little because we were debt-free and live simply was a very comforting feeling. But that's just us and I don't claim it's the right money move for everyone.

 

[nun]

Obviously the debt vs invest arguement is an old one and I certainly don't know the answer so I do both. Right now I'm putting a third of my excess income and half of my recent market gains towards extra principal with the goal of paying off the mortgage in 4 years. I haven't stopped investing, just increased the amount of my money I'm using to get rid of my final debt.

 

[Martha]

So when an emotional type makes a decision which seems contrary to a rational view, there is usually *something* behind that emotional response. That is what I'm searching for. Generally, these people are not stupid, they are not incapable of understanding the rational view, they may not be ignorant of the data - it is just that the *something* that drives them emotionally is *stronger* (for them) than the rational drivers. An example:



-ERD50

You are making too many assumptions. Emotional types? Contrary to rational view? It can be completely rational to pay off your mortgage early. It can be completely rational to borrow money on your home to invest in the market. It can be completely rational not to. FIREcalc tells some about historical risk and surviability but it does not predict the future. The thing with risk is that bad things can happen when you take risk and either choice has risks. It is not irrational for someone to say that they want a paid off house because their only source of income is their portfolio and they want my expenses really low if there is a crash. It is also rational for Nords to say that he has a inflation adjusted pension so using leverage to invest in the market is not so risky and may really pay off.

You don't include your home in your calculations. That is not irrational. But it also is not irrational for people to include their home. The future cannot be predicted. There are black swans. There are divorces. Things we never dream of can and will happen.

BTW, Isaac Asimov was afraid to fly. He was smart, rational, and not what I would call an "emotional type."

 

[REWahoo]

So I just don't get why so many people feel so strongly about paying down a mortgage.

The same can be said for the reverse opinions.

I don't get it when some people go on and on in what appears to be circular debates about some of the topics on this forum. To each his own I suppose.

 

[Trek]

To paraphrase a line from Dave Ramsey. 100% of people in home foreclosure had a mortgage.

 

[NW-Bound]

I am of the type who prefers to have as little debt as possible. Even if FireCalc shows a slight advantage to a mortgage holder, the truth is FireCalc uses the past to predict the future, and we all know how MFs always carry a caveat statement about their performance in the ads.

As for me, being free of large debts allows me to concentrate on the rest of my portfolio. I never really worry about the valuation of my 2 houses, and only look at RE info every so often out of curiosity, as I won't be selling any of them any time soon.

My financial state might be the same or even better if I were to invest the houses' valuations in the market, but that requires the cojones of tungsten that I simply do not possess. Even with low debts, it was tough enough to keep buying during the recent downturn or, as FireDreamer said, to keep balancing down into an abyss. I have found that an investor must truly understand and conquer him or herself first. I am not a good multitasker, and I can concentrate on my portfolio better with a minimal expense budget. Despite all my joke postings about "buy, buy, buy", I have also admitted that I am a cross between a bull and a chicken. Works for me so far...

 

[beowulf]

Let's throw another twist into this. What if virtually all of your available funds, no matter how much that might be, is in tax advantage accounts, where any withdrawal will result in full taxation as ordinary income? To me, that materially changes the equation when you have to pay 37% or more in federal and state taxes of every dollar freed up to pay off mortgage debt.

Any thoughts?

 

[ziggy29]

Let's throw another twist into this. What if virtually all of your available funds, no matter how much that might be, is in tax advantage accounts, where any withdrawal will result in full taxation as ordinary income? To me, that materially changes the equation when you have to pay 37% or more in federal and state taxes of every dollar freed up to pay off mortgage debt.

I probably wouldn't accelerate the withdrawal of tax-deferred assets to pay down a (usually) tax-deductible debt. And the higher your tax bracket, the less compelling the argument would be for paying down debt where you'd have to withdraw from a 401K or traditional IRA to do it. If someone is in a combined 40% state and federal income tax bracket, every $1000 you pay down requires a withdrawal of $1,667 and adds $400 to your taxes. That doesn't seem like a particularly good deal to me.

I think the default assumption, though, is that we're talking about paying down a mortgage with after-tax money -- especially when said money is only earning 1-2% compared with an after-tax interest rate of (say) 3.5% to 5% on the mortgage.

 

[NW-Bound]

About paying off the mortage with after-tax cash, it also depends on the relative size of your cash hoard. If the mortgage pay-off means depleting your after-tax assets, then ERD50's point about maintaining liquidity should be heeded.

It is tough to talk in general terms without some specific numbers.

 

[ziggy29]

About paying off the mortage with after-tax cash, it also depends on the relative size of your cash hoard. If the mortgage pay-off means depleting your cash, then ERD50's point about maintaining liquidity should be heeded.

It is tough to talk in general terms without some specific numbers.

True dat. I'd be sorely tempted to deplete my emergency fund somewhat to pay down non-deductible 15% credit card debt. (In fact, those of you who tune into Dave Ramsey know that he'd suggest paying it down with all but $1,000 of your emergency fund in the general case.)

The case for raiding it to pay down a deductible 5-6% loan is far weaker -- especially in this economy and job market where liquidity is crucial to peace of mind and the ability to weather a storm. But if you have a particularly large emergency fund and/or a solid one with positive monthly cash flow, using *that* excess to pay the mortgage down is reasonable.

 

[ERD50]

There have been a fair number of similar replies, let me try to generalize with these responses:

(I added the numbers to make it easier to reply to)

You are making too many assumptions. Emotional types? Contrary to rational view?

1) It can be completely rational to pay off your mortgage early.
2) It can be completely rational to borrow money on your home to invest in the market.
3) It can be completely rational not to.

We are in complete agreement points 1,2,3. Let re-re-re-iterate my point :

The differences seem slight, and may fall one way or the other depending on the situation. Do it or don't, no big deal says I. A rational case can be made either way.

What I comment on, is when people act like it *is* a big deal, high five-ing, happy dances, congratulating each other like pre-paying mortgage debt is an important step to FIRE. Which would infer that they think (though they may not come out and say it) *not* pre-paying mortgage debt is a detrimental step to FIRE. It's binary, you can't have one w/o the other.

It is not irrational for someone to say that they want a paid off house because their only source of income is their portfolio and they want my expenses really low if there is a crash.

But it is irrational to ignore the effects of the larger portfolio that results from holding the debt. I keep seeing this "lower expenses" used as an explanation, as if there is no larger portfolio. That is not a discussion of pay-off versus no-pay-off. That is a statement that a lower SWR is better, which I agree with . But SWR is a ratio, not a number. Gotta include the larger portfolio in the discussion, or it is irrational.

I don't get it when some people go on and on in what appears to be circular debates about some of the topics on this forum. To each his own I suppose.

I'd agree with that it would be circular if I were trying to say that holding debt was a slam dunk winner. That would go back-forth because everybody's numbers are different. But I've never said that. I'm saying people should look at the numbers and decide for themselves. If the emotional draw is greater than the numbers, then go with your heart. But don't try to tell me that your numbers are going to be better because of an emotional decision.

I don't see how "do the analysis" is a circular argument. It's not an argument at all. It's universally sound advice.

Let's throw another twist into this. What if virtually all of your available funds, no matter how much that might be, is in tax advantage accounts, where any withdrawal will result in full taxation as ordinary income? To me, that materially changes the equation when you have to pay 37% or more in federal and state taxes of every dollar freed up to pay off mortgage debt.

Any thoughts?

Yes. Consistent with all my other thoughts on this. Run the numbers.

Some people may incur taxes on the extra cash flow to pay the monthly mortgage. But those who pre-pay have to figure the tax load on those payments also. I guess if it is taxed income, and all your tax advantaged options are utilized, there is no added tax by putting towards the mortgage. Pulling money out to prepay would be different.

-ERD50

 

[soupcxan]

To paraphrase a line from Dave Ramsey. 100% of people in home foreclosure had a mortgage.

Not true - you could own a home free and clear, but if you fail to pay your property taxes then the gubmint can get a tax lien and foreclose on the house.

Do you have any other hairs you need split?

 

[nun]

Why is everyone so polarized here. I'm paying down the mortgage faster than required, but I'm not going to sell all my after tax investments to pay it off I want that liquidity. But I will take some of my recent gains and pay down principal. I figure I'm selling into a rising market and that's a good thing right. I've cashed in $20k and put it towards the mortgage so far and Its nice to see the principal fall so much and know I've locked in some gains. When the principal is maybe half of my after tax investments I'll consider justpaying it off.

 

[NW-Bound]

Why is everyone so polarized here?

Because life would be boring if after you said something, the others simply said "Uh huh".

Reminded me of this story.

A man walked into a bar, and saw a group of people sitting at a corner of the room, nursing their beer. Every so often, one would call out a number like "17" or "58" and the group would burst out laughing. This strange scene went on for 10-15 minutes. So, the man asked the bartender what these curious people were up to.

The bartender said "Oh, they are a club of people who like to tell jokes. They share several favorite ones, and like to tell them over and over. After a while, they make a list and assign a number to each one. That way, they can recount a joke more succinctly."

The man nodded at this clever arrangement. But then he thought of something. He asked the bartender "But at the last number, the 63, there was one man that kept on laughing after the group has stopped. That must be a good one".

The bartender said "Nah, he simply hasn't heard that one before.".

 

[Trek]

Not true - you could own a home free and clear, but if you fail to pay your property taxes then the gubmint can get a tax lien and foreclose on the house.

Do you have any other hairs you need split?

hehe, it should read "bank foreclosure" to be more accurate I guess. You are correct though as I believe all States tax property, so it's therefore impossible to fully own property at all. You simply rent your home from the gov't via property taxes. Don't pay the tax and they take your property.

 

[clifp]

I'd agree with that it would be circular if I were trying to say that holding debt was a slam dunk winner. That would go back-forth because everybody's numbers are different. But I've never said that. I'm saying people should look at the numbers and decide for themselves. If the emotional draw is greater than the numbers, then go with your heart. But don't try to tell me that your numbers are going to be better because of an emotional decision.

I don't see how "do the analysis" is a circular argument. It's not an argument at all. It's universally sound advice.

Don't you see ERD if you simple trust your gut then you will always been happy, and that is good thing. If your gut say pay off the mortgage but the numbers say no you are better of keeping the mortgage than you will be conflicted. Emotional conflict is bad. As you say the advantages or disadvantages of paying off the mortgage is relatively small so probably doesn't matter too much what one you do.

Anyway after engaging in yet another mortgage debt, my final answer on the pay off don't pay off debt is.
Ignorance is bliss
Do worry be happy and
If it feels good do it.

And congratulations to all who have paid off their mortgage and also to all of those who after running the numbers elect to keep a mortgage.

I'm not sure what emoticon I should use for this post.

 

[REWahoo]

I'm not sure what emoticon I should use for this post.

 

[Nords]

Don't you see ERD...
I'm not sure what emoticon I should use for this post.

.

 

[clifp]

Nords is the early leader.

 

[REWahoo]

In the presence of clearly superior competition, I hereby withdraw my entry...

 

[nun]

Because life would be boring if after you said something, the others simply said "Uh huh".

I'm not looking for "Uh huh". I'm suggesting that theres now way to definitively decide between investing everything and keeping the mortgage, or using "too" much of your liquidity to pay off the mortgage are because the complexity of the problem prevents a definitive answer. So do both. Decide how much liquidity to need and plough the rest into the mortgage, and put 50% of any gains into the mortgage too.

 

[NW-Bound]

I'm not looking for "Uh huh".

But you didn't expect such exciting debate either! If you ask 10 forum members here about something, you would get 15 different opinions.



... About 2 or 3 of those probably come from me alone.

 

[NW-Bound]

Note: 99% of forum members are wanna-be economists.


The remaining 1% are true economists by training.


And talk about economists, Truman once said "Get me a one-handed economist."


It was because they kept telling him "On one hand, blah blah blah, and on the other hand, blah blah blah..."