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Eliminating debt is my main FIRE goal
Old 08-03-2009, 09:29 AM   #1
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Eliminating debt is my main FIRE goal

Is anyone taking some or all of the gains they are getting in this little market run up and using them to pay down the principal on their mortgage?
That's what I've been doing. I'm locking in some of my gains.

The only debt I have is $200k left to pay on a two family house currently valued at $550k. So things are pretty good, but the $2500 monthly mortgage payment means that I have to keep turning up at work each day. Once the mortgage is gone the $2000/month rent that the house generates will go a long way to covering my expenses and I can FIRE.
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Old 08-03-2009, 09:44 AM   #2
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(There are many past threads on the advisability of paying off a mortgage, but I think there are always new thoughts on these topics.)

Some years ago my spreadsheet told me that there was no way I could retire with a mortgage or rent to pay. So, I bought a house and paid it off.

Apparently many here feel that paying off a house is not advantageous from the viewpoint of long term financial gain. This is especially true if you are expecting a bull market right now. However, it does make sense for some of us.
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Old 08-03-2009, 09:53 AM   #3
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My "calculation" was that a year ago I looked around and 4.5% (my mortgage rate) seemed like a good return so I started putting 50% of my after tax savings towards extra principal. I've kept doing that and taken 50% of my recent gains towards the mortgage too. This hasn't maximized my gains, but I'll be happy at my approach if we have a double dip recession or if things keep improving.

At the peak of the market I could have paid off the mortgage. I wish I'd done what I'm doing now back then as I'd be 2 years closer to FIRE. Now I'm looking at 2013.
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Old 08-03-2009, 09:59 AM   #4
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Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.
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Old 08-03-2009, 10:06 AM   #5
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Originally Posted by tiuxiu View Post
Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.
So true, and for those of us that don't drink, the beer and electricity is optional in a doomsday scenario.

When investing, lower risk gives you lower return. Paying off a mortgage is lower risk than investing in just about anything, IMO. So, that is how I justify the lower return (plus the fact that my spreadsheet said that this would work best in my case).
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Old 08-03-2009, 10:24 AM   #6
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Originally Posted by tiuxiu View Post
Allow me to be the first of the inevitable "it's a great move for the mental satisfaction" wave of posters that pop up in these threads.

Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.
How well we do at investing is so dependent on the time scale over which we choose to measure our success. Two years ago we were doing just fine. One year ago, Oh the pain, now hey it's not so bad we've seen our 401ks etc grow a bit. For me I'm applying the "bird in the hand" philosophy. Riding the wave up again is predicated on that wave not breaking on the shores of a double dip. Anyway isn't FIRE all about financial independence and by eliminating that mortgage I'm free of the market and it's ups and downs.
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Old 08-03-2009, 10:34 AM   #7
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Being debt-free is, in my opinion, the first step toward FIRE. Especially for us younger folks still working toward FIRE, it's difficult to predict how things will go over the next decade or so, but one thing is certain -- having little or no debt gives you many more options, both financially and otherwise.

It may not always be precisely the best option from a numbers perspective, but it's rarely a bad move to pay off debt and free yourself financially.
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Old 08-03-2009, 10:53 AM   #8
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Originally Posted by tiuxiu View Post
Being debt free just feels so nice... if the shiit goes down I just need to be able to pay property taxes, buy beer, and pay the electrical bill to keep the beer cold.
The problem I have with statements like this is that they completely ignore one side of the equation. And I don't see how that helps anyone. We should look at both sides in order to make a more fully informed decision.

Here's the other side of that statement:

If you invest the money rather than lock it up in your house, then... if the shiit goes down you have the liquidity you need to pay the mortgage, the property taxes, buy beer, and pay the electrical bill to keep the beer cold for a long, long, long time.

Before you tell me it is "risky" to have that money invested, do some FIRECALC runs, and see what they say. The runs I've done show a *slight* advantage to keeping the debt. Not a big deal either way, and the numbers may be different for your profile, but I doubt it would be very much different.

Lusitan: having little or no debt gives you many more options, both financially and otherwise.

Remember, having liquidity also provides options.

-ERD50
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Old 08-03-2009, 10:59 AM   #9
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The problem I have with statements like this is that they completely ignore one side of the equation. And I don't see how that helps anyone. We should look at both sides in order to make a more fully informed decision.

Remember, having liquidity also provides options.

-ERD50
Yes it does, and I wish I'd used my liquidity to pay off my mortgage two years ago. Knowing when to use your liquidity for something other than mental masturbation is the key. We all know how difficult and dangerous it is to time the market, hence my approach of taking 50% of my gains to pay off the mortgage and letting 50% ride in the market.
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Old 08-03-2009, 11:07 AM   #10
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y. We all know how difficult and dangerous it is to time the market, ...
Who mentioned market timing? I suggested doing a FIRECALC run for a reference point - no market timing there.

-ERD50
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Old 08-03-2009, 11:20 AM   #11
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Who mentioned market timing? I suggested doing a FIRECALC run for a reference point - no market timing there.

-ERD50
Sorry

However, for me FIRE calcs are just the beginning. They are part of planning and as you say there is another side of the equation. I know that I'll feel happy when I have no mortgage, But I also want to get some returns, but I'm not going to trust everything to a Monte Carlo simulation, that's what fund managers have been telling us for the past 20 years. No, take a portion of your gains as they arise. For me this is just like keeping a balanced portfolio. As we balance risk in our investing we should also balance the amount of our gains we leave in the market, it's similar to rebalancing a portfolio but rather than redistributing gains from equities to say bonds I'm putting them towards a 4.5% mortgage.
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Old 08-03-2009, 11:23 AM   #12
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One of my main goals before retirement was to get completely out of debt.

I retired two years ago with no debt - no mortgage, no car payment, no cc debt - nothing, nada.

It certainly makes retirement, and life, a whole lot easier, happier and more affordable.


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Old 08-03-2009, 11:46 AM   #13
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Sorry

However, for me FIRE calcs are just the beginning. ..... I'm not going to trust everything to a Monte Carlo simulation
FIRECALC is not Monte Carlo simulation. It is a report on all past scenarios. Monte Carlo is a randomization of inputs to determine a range of outputs.


Quote:
As we balance risk in our investing we should also balance the amount of our gains we leave in the market, it's similar to rebalancing a portfolio but rather than redistributing gains from equities to say bonds I'm putting them towards a 4.5% mortgage.
OK, I can see that view. However, the FIRECALC runs I've done show that you can lower your risk by keeping that mortgage money invested at your chosen AA, rather than putting it all in bonds. Apparently, the larger portfolio buffers the downturns better than a more conservative AA. Plus, if I rebalance into bonds, I can rebalance out later. How do I rebalance out of a mortgage?

Remember, if "safer, more conservative" *really* meant "lower risk", the highest success rates in FIRCALC would be from the "safer, more conservative" portfolios. But that is not the case. A range around ~ 70% equities appears to provide the best outcomes. Again, this may vary depending upon your profile, but FIRECALC can show you how you would do across a range of AA (see the "investigate" tab).

-ERD50
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Old 08-03-2009, 11:54 AM   #14
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FIRECALC is not Monte Carlo simulation. It is a report on all past scenarios. Monte Carlo is a randomization of inputs to determine a range of outputs.



-ERD50
I was being ironic about the returns we can expect form the stock market.....sorry physicist's joke, glad someone caught it though.
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Old 08-03-2009, 11:58 AM   #15
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Before you tell me it is "risky" to have that money invested
It is risky to have that money invested.
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Old 08-03-2009, 12:17 PM   #16
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It is risky to have that money invested.
You are correct. And it is also risky to *not* have it invested. The only way I know to eliminate risk is to die.

Do a FIRCALC run and see how the risk compares for you.

-ERD50
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Old 08-03-2009, 12:26 PM   #17
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You are correct. And it is also risky to *not* have it invested. The only way I know to eliminate risk is to die.

Do a FIRCALC run and see how the risk compares for you.

-ERD50
Does Firecalc take into consideration the possibility of getting a reverse mortgage at a later point in time?
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Old 08-03-2009, 12:48 PM   #18
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I like nun's idea of taking 50% of gains and using them to pay down the house and leaving 50% in the market. My problem is that I'm not retired and nearly all of our assets are in I Bonds, IRAs, 401Ks and 403bs, meaning that any attempt to take out money will result in a nasty tax scenario (I'm over 60, so no penalty, but it's all fully taxable income).
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Old 08-03-2009, 01:59 PM   #19
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I agree with the eliminating debt . I've been mortgage free since 1996 and it is so freeing . I also have not had a car payment since then but I'm rethinking that idea since a lot of the car dealers are offering 0% or 2.4% depending on the length of the loan . So I would just make the payments and leave my money invested where it will hopefully make more than 0%.
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Old 08-03-2009, 02:04 PM   #20
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So I would just make the payments and leave my money invested where it will hopefully make more than 0%.
Money market account will beat zero, barely.
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