Eliminating debt is my main FIRE goal

[W2R]

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..."

On the one hand, I am glad that I paid off my mortgage. On the other hand, I don't think you can go wrong whether you do that, or invest. Either way you are a thousand miles ahead of most people.

See? I'm one of those 99% that NW-Bound was talking about. And to think, I haven't ever taken a class in Economics.

 

[NW-Bound]

See how you cannot tell a wannabe economist from a trained one?

 

[ERD50]

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.

This seems totally reasonable to me. Since it appears to be pretty much six-of-one, half-dozen-of-the-other for most people, splitting the difference is a reasonable approach. IMO.

On the one hand, I am glad that I paid off my mortgage. On the other hand, I don't think you can go wrong whether you do that, or invest. Either way you are a thousand miles ahead of most people.

I feel as if I have found inner peace . I totally agree with that sentiment.

( no 'cheers' emoticon in the list?) - Oh well, a sparkling water with a twist for you (or whatever your celebratory beverage is), I may break open my 2006 Vintage Ale to celebrate. Cheers!

-ERD50

 

[ziggy29]

On the one hand, I am glad that I paid off my mortgage. On the other hand, I don't think you can go wrong whether you do that, or invest. Either way you are a thousand miles ahead of most people.

True. The bottom line, IMO, is that the key for most of us to building wealth is to consistently earn more than you spend and to use the difference (excess cash flow) productively. Both investing and debt reduction are productive uses of excess cash flow, and both will likely serve you very well in the long run.

In the end, the decision one makes with respect to using extra cash flow -- whether to invest it or pay down a mortgage with it -- is far less critical than the decision to live below your means and use the rest to bolster the balance sheet and increase net worth one way or the other.

 

[Lusitan]

the key for most of us to building wealth is to consistently earn more than you spend and to use the difference (excess cash flow) productively. Both investing and debt reduction are productive uses of excess cash flow, and both will likely serve you very well in the long run.

In the end, the decision one makes with respect to using extra cash flow -- whether to invest it or pay down a mortgage with it -- is far less critical than the decision to live below your means and use the rest to bolster the balance sheet and increase net worth one way or the other.

Well said.

 

[missionfinder]

But what I find interesting is your feeling that using your investments to pay on your mortgage would be using "deflated" money. If you believe that your investment money is really deflated, than all the more reason to pay as little as you can on your mortgage (or even get a bigger one) and pile any extra cash into investments before they "reflate." Or am I missing something?

I am piling a lot of cash into investments. Quite a bit, actually. Its just that the eBay stuff, the spouse and I have an agreement on: use it for her projects around the house, or pay down the mortgage. Its our compromise, because she gets the warm fuzzies paying down the mortgage faster, while it does nothing for me. That's why I said it was a compromise. I'd rather throw it all into investments, she'd rather play it safer and throw it at the mortgage.

I just noticed a typo in my previous post. I didn't mean we pay an exta 2.04% yearly, but rather, a extra 2.04 payments yearly.

Hope this clarifies my position, as it did admittedly leave doubt.

 

[missionfinder]

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

Yeah, but while a clever thing to say, he also tends to give less than optimal advice about where to put money.

 

[ziggy29]

Yeah, but while a clever thing to say, he also tends to give less than optimal advice about where to put money.

You mean you haven't been averaging 12% in the stock market?

 

[Sarah in SC]

Just remember that Joe Domininguez didn't give such great investment advice either, but he's still one of my heroes, too, Ziggy.

 

[IndependentlyPoor]

I suspect that most folks who read this forum are baby-boomers and for us, houses and mortgages were an ugly surprise. I bought my first house in 1981, and I can remember the saying then was "you aren't buying a house, you are buying a mortgage". Interest rates were rising so rapidly that folks really feared being locked out of the market forever.

Too many game-changing economic events have happened during our working lives. The Federal Reserve changed their economic strategy twice: we went from a stable interest rate strategy to Friedmanesque monetarism, then abandoned monetarism for whatever it is that we have now. We toyed with wage and price controls, then abandoned the gold standard in 1973. It only takes a look at the inflation rate and interest rate to see that it hasn't been a smooth ride.

So we are a bit techy about mortgages? Do tell.

 

[Nords]

I suspect that most folks who read this forum are baby-boomers and for us, houses and mortgages were an ugly surprise. I bought my first house in 1981, and I can remember the saying then was "you aren't buying a house, you are buying a mortgage". Interest rates were rising so rapidly that folks really feared being locked out of the market forever.

When we refinanced for 5.5% my FIL pulled out his 1964 mortgage on his first home-- the same rate. Of course his was typewritten on a single piece of heavy fill-in-the-blanks 5"x8" cardstock and ours was a bit bulkier. His mortgage payment was $88/month on a $17K home and ours... wasn't. But other than those differences, at the time we couldn't believe that we were getting the lowest rates in 40 years.

Five years later we nailed down 4.5%. I'm running out of superlatives.

 

[nun]

When we refinanced for 5.5% my FIL pulled out his 1964 mortgage on his first home-- the same rate. Of course his was typewritten on a single piece of heavy fill-in-the-blanks 5"x8" cardstock and ours was a bit bulkier. His mortgage payment was $88/month on a $17K home and ours... wasn't. But other than those differences, at the time we couldn't believe that we were getting the lowest rates in 40 years.

Five years later we nailed down 4.5%. I'm running out of superlatives.

I can't complain either, 4.5% over 15 years. Bought the house for $330k in 1997, peaked at $650k in early 2006, sank to $500k in Jan 2009, now at $550k

 

[Dennis]

Well I've have some nice gains in yrs past and never took them out to pay down anything, for a couple of reasons

1. My debts would force me to Work more and Live With-in my means while saving for retirement and There is Always Places for $ in a Family Home if the wife knows it there.

2. Our savings is for entirely our retirement, not to make our lives easier or allow us to rest on our laurels along the way, but end up short come retirement time

However, there have been And probably will be in the future, I may find some extra $ laying around to gamble on a Short Term investment I'm confident about and take that profit $ to pay down debts, or for something else..

 

[Lusitan]

1. My debts would force me to Work more ...

Funny -- I agree with you, and yet have the complete opposite reaction to debt.

I don't like feeling like I'm forced to work more because of debt. Whether it's actually true or not is another matter, but carrying debt at least makes me feel more like I'm forced to work more.

 

[SarahW]

Put me in the "Debt Free Just Feels Good" column. Mortgage paid off, baby.

 

[Moscyn]

My aim has always been debt free mortgage paid and then work for 2 more years just to build up funds for whatever. I'm already in the work for 2 more years stage and I can tell you it is so liberating. I don't feel tied down in my job or fear of being fired. Of course, looking back, there were opportunity costs of tying up too much funds in the house and not being able to invest more but I think peace of mind for me was most important.

 

[stephenandrew]

Hi--
For waht it is worth, the Wall Street Journal published an article on holding a mortgage into retirement---seemd sort of relevant to this discussion. Thought you might want to see it. Link: Retiring? Pay Off Your Mortgage - WSJ.com

 

[mews]

ERD50, here is my driver.

Now, we are talking about a period 20 to 10 years ago, but...

I bought a place in NYC in 1989. Small mortgage, but large for me. (I was right on the line for approval, I was told later - I don't make big bucks.)

About a year later, started to send in extra payment when I could. After that, I started to regularly pay down the mortgage.

Why?

a) I don't like my things owning me, and that is how I relate to this kind of debt. Why am I going to work? To pay the mortage and maintenance. Hmmmm - don't like that.

b) Even then I had the idea (since executed) of changing careers. I didn't know the details, but I knew I would eventually do something different. A low monthly nut meant flexibility and freedom. Paying off the mortgage let me go to grad school in NYC with a cost of living of about $1,100 a month total, while living in my own place in a nice area.

c) W2R's simplification - Mortgage is gone. I don't think about it. I don't budget for it. I don't write checks for it. Gone, gone, gone.

ta,
mew

 

[jdw_fire]

Good questions, here's what I make of the FIRECALC runs I've done - I seem to get the best results by maintaining my AA with the added mortgage money.

As I alluded to earlier, "safe from volatility" doesn't correlate with "safe from eating dog food when I'm 90". A portfolio of 100% CDs might be "safe from volatility", but FIRECALC says you are much more likely to FAIL than with a 75/25 Eq/Fixed portfolio. So, in the only way that really matters to me, a 75/25 is safer than a 0/100.

I used to agree with the camp that said for apples-apples you need to invest the mortgage money in "safe" investments. But if I use FIRECALC for my measure of safety, it says stick with your AA %. Yes, that *sounds* more "risky", but if it provides a higher success rate, I would say it is less risky. If drawing on that on hard times was an overall negative, surely FIRECALC would report a higher failure rate in those cases. But it does not with my numbers.

Unless you just don't give any credence to FIRECALC, but I think it is a really wonderful tool (tool, not predictor, not an absolute) for perspective.

Remember, you boosted your fixed by 25% of the mortgage amount too. And rebalancing means a little bit more getting shifted from EQ to Fixed in good times. I think it is the combination of all those that makes the difference.

Perspective: Remember that my runs have shown it to be a *slight* advantage to hold the debt. So slight, it isn't worth 1/10,000 of the words we have added to this topic. Do it or don't do it - no biggie. But as long as so many people keep giving the impression that this is a key element to FIRE success, I'm going to keep commenting that people should run the numbers for themselves before they get too excited. Better to put your energies on other things. Paying down mortgage debt or not just isn't going to make/break a retirement from what I have seen. No reason to think it will/won't, unless you have run the numbers for your case and see differently.

-ERD50

your argument is based on complete faith in FIRECalc as a predictive tool. well what if the future is different than the past (as evidenced by this decade). the nice thing about mortgage (or any debt) repayment is you have a locked in rate of return on your money which doesnt depend on history repeating AND you have a lower expense requirement for future living (not to mention a F&C place to live).

your post implies that an investor either doesnt give FIRECalc any credence or believes it entirely. have you noticed how many people on here are no longer comfortable with a 4% "SWR" and are shooting for something 3% or less. looks like there are some people who dont have your complete faith in FIRECalc. well i think there is middle ground. i dont think it is the binary choice you make it out to be. i think it is prudent to "ensure" a minimal retired lifestyle (where the absense of debt is of great value) and then go more risky for the discresionary spending on top of that. and FIRECalc is surely a useful tool for determining how much you can WD in this higher risk environment.

 

[ERD50]

ERD50, here is my driver. ...

your argument is based on...

mews & jdw-fire - thanks for the comments - I didn't want it to appear that I was ignoring you, but I am going to be mostly away from the computer for at least a few more days. If you look over my (numerous) posts on the subject, I'm sure you'll find that my replies to those questions/comments have been covered before.

If after that, you would like a direct/specific reply, let me know and I'll give it some time next week.


Thanks, - ERD50

 

[Bestwifeever]

Hi--
For waht it is worth, the Wall Street Journal published an article on holding a mortgage into retirement---seemd sort of relevant to this discussion. Thought you might want to see it. Link: Retiring? Pay Off Your Mortgage - WSJ.com

Interesting article--thanks for posting the link. From the article:

To be sure, for some retirees paying down a mortgage isn't an option. But for those who have savings beyond what is needed for living expenses, is it ever a good idea to hold a mortgage into retirement instead of using that money to pay it down?
Anthony Webb, a research economist at the Center for Retirement Research at Boston College, says the answer for most people is "no."

 

[Trek]

Here's a great reason not to carry a mortgage. You can eliminate issues like this.

My Bad! Woman's House Mistakenly Auctioned by Bank | NBC Miami

 

[M Paquette]

Here's a great reason not to carry a mortgage. You can eliminate issues like this.

My Bad! Woman's House Mistakenly Auctioned by Bank | NBC Miami

Not necessarily. The Miami-Dade County Clerk made a tiny little boo-boo, failing to file paperwork related to the refinancing and a judge's order to quash the sale. Oopsie.

You could get into the same state through property tax problems, or even homeowners association dues. Patrick Mahaffay lost his Sea Ranch home for being behind on his HOA dues. The $300,000 home was sold at auction for $2,403 to a business specializing in vulture trades. The former owner protested, of course. The buyer finally offered to sell the home back to the former owner for $10,000.

 

[cjking]

I am busy reading the Otar book mentioned in a more recent thread.

(The book is obtainable at this link, in the near future only.)

otar retirement calculator



I though of this thread when I found a whole chapter on borrowing to invest. I'm prevented from cutting and pasting some brief quotes from the beginning and end of the chapter by security in the PDF, so I will paraphrase.





Near the beginning of the chapter:

• when you borrow to invest, there are up to six parties who may benefit from the transaction, but only one who may lose, you.
• if you borrow to invest, you must think you are smarter or luckier than the bank, otherwise why wouldn't they just invest the money directly.

At the end of the chapter there is a checklist of several conditions you must satisfy if you are going to borrow to invest, I will just mention three.

• Do not borrow during retirement or within ten years of retirement.
• Do not borrow more than half the amount invested.
• You need to out-peform the index by 4% or more.

If you disagree with these points, I suggest you read the book rather than respond to them in isolation, as I don't plan to relay the arguments for the other side.

 

[ERD50]

Hi--
For waht it is worth, the Wall Street Journal published an article on holding a mortgage into retirement---seemd sort of relevant to this discussion. Thought you might want to see it. Link: Retiring? Pay Off Your Mortgage - WSJ.com

Interesting article--thanks for posting the link. From the article:

To be sure, for some retirees paying down a mortgage isn't an option. But for those who have savings beyond what is needed for living expenses, is it ever a good idea to hold a mortgage into retirement instead of using that money to pay it down?
Anthony Webb, a research economist at the Center for Retirement Research at Boston College, says the answer for most people is "no."

I finally got around to reading the article. AFAIAC, this is typical "journalism" that does more to cloud the issue than to clarify it. The title indicates the article is about pay-off or invest (which means you have the funds to pay it off), but the first half is a mix of retiring w/o sufficient net worth, increased credit card debt that people carry today, etc, and makes no distinction that that is a separate issue.

And while the quote from a research economist that BWE includes seems to be a pretty unequivocal "NO" for most people, you really need to see it in its full context:

For money held in a money-market account or some other safe investment such as U.S. Treasurys, Mr. Webb says an investor is unlikely to earn enough of a return to offset the cost of the mortgage interest.

Well, that does not take an advanced degree to comprehend. You can't invest money at a lower expected return than what you borrow it at and expect to come out ahead. That's obvious.

And while a portfolio of all stocks could earn high enough returns to come out ahead of a mortgage, in a diversified portfolio of stocks and bonds the drag of the mortgage is likely to offset the potential boost given by stocks.

I'm assuming this was a case of poor editing. Does he mean "offset" or "reduce"? Clearly, the interest payments reduce the stock gains, but long term gains in stocks are normally higher than current mortgage rates. So the gains are not "offset" (if he meant "totally offset").

A household that carries a mortgage and invests in the stock market is basically trading on margin," he says.

OK, you can say it that way if you want to make it sound scary. But is that always a bad thing? I wouldn't do it if the mortgage was a large % of my NW, and it always makes me wonder (maybe I'll write him):

Does that also mean that no one should ever invest a penny in anything (outside of an emergency fund) until their mortgage is paid off? By his words, a 401K contribution would qualify as "trading on margin", right? I'm pretty sure that a significant amount of 401Ks, IRAs and other savings is being done by people with outstanding mortgages. But I don't hear any economists recommending that people avoid those savings until the home is paid for, warning them that they are "trading on margin". Or did I miss those?

-ERD50