How being conservative probably cost me $30K

[accountingsucks]

I have always been a "pay your mortgage off ASAP type person" and at the age of 31 I was able to pay the $102K mortgage on my $185K home off after being in the home about 5 years. I did invest in my company RSP (similar to US 401K basically) plan, and my own, but only to the tune of about 10 - 15% of my income....everything else went to prepay the mortgage at renewal or on anniversary dates.

The TSX index had a 94% compounded annualized return since 2002 which is when I bought my home. My mortgage was at around 5% during this time. Although I haven't done the precise math, I figure that prepaying my mortgage rather than investing in the market has cost me somewhere between $25-$40K....too depressing to actually sit down and do the math. The good news is that I am now mortgage free and can invest what I was paying in monthly mortgage amounts directly into my RRSP and that I really am not too worried about my financial future. I can pretty much sock away every extra penny in the market and not lose any sleep at night worrying about my mortgage. Also I am in a higher tax bracket, so my RRSP contributions will get a better tax refund than when I was making less dough a few years ago. Those are the only 2 positives I can think of.

Looking back though, if I knew what the markets would be doing in the last 5 years I would have of course just paid my mortgage with no extra payments and invested as much as I could in the markets. I pretty much got the timing backwards as the markets are high now, and I don't see a lot of value out there and I have $ to invest, but nowhere to invest it in. When I got my mortgage in 2002, we just came off the tech bubble crash, so being conservative seemed the way to go for me...the prospect of having debt for the next 25 years was very off-putting.

 

[Alan]

Looking back though, if I knew what the markets would be doing in the last 5 years

You and many thousands of others. I shouldn't beat yourself up about it. Count is as a learning experience. I paid off my mortagage early and don't regret it, although I didn't start paying it down until I was maxing out 401(k)s and IRAs. I'm sure if I went back and made the calculations I would have probably done better in the market but I liked that debt-free feeling.

 

[queeneev]

accountingsucks, I like your username!

I concur, don't dwell on woulda coulda's. You made a choice that was important to you, and having a home debt free is an awesome accomplishment. Foregone opportunity costs exst with every financial decision. Sure, you could have made other investment choices, but it only takes one bad one to wipe out all the good ones. And you're very young; time is on your side! If I could undo all the bad investment choices I have made, I'd be twice as wealthy as I am today. Just remember going forward to follow the basic rules of investing in products that match your risk tolerance, and stay well diversified.

 

[Meadbh]

Completely agree with queeneev. You have done well.There is no point in crying over spilt milk / worrying about sunk costs. IMHO you made a perfectly reasonable decision to retire the mortgage early. Why go on paying mortgage interest when (in Canada) it isn't tax deductible? Now you own your home free and clear, you have a big chunk of equity, and presumably are debt free. Have you considered taking on some new debt for investment purposes? Interest on investment debt should be tax deductible.

 

[samclem]

The TSX index had a 94% compounded annualized return since 2002 which is when I bought my home.

No, it's only had approx a 13% annual rate of return for the 5 years previous to March 31, 2007).

But, I understand your point. Still, your decision was not a "bad" or "wrong" one. Based on the information available AT THE TIME (which is the only way the quality of a decision can be fairly judged) there was little reason to believe that Canadian stocks would do significantly better than your 5% mortgage rate. If the market would have tanked (and there was a potential it could), you'd have been very happy with your choice.

There's no real value in looking back, not even any lessons to be learned 9since the next time you need to make this decision the underlying conditions will be different). Keep moving forward. You've got a paid-for home and that should bring considerable peace of mind.

 

[Trek]

I have always been a "pay your mortgage off ASAP type person" and at the age of 31 I was able to pay the $102K mortgage on my $185K home off after being in the home about 5 years.

You should be jumping for joy! There is nothing wrong or bad with being debt free! Especially at 31!

I could have financed my place here, but I paid cash. I don't do debt. I'm one of those that sleeps better knowing everything I have is paid for. I don't like living in housing owned by a bank or mortgage company. I don't have to worry about some stock market crash or other investment tanking and jeopardizing being able to pay my mortgage payment. Or just dealing with billing f**k ups. Or having the bank / mortgage company calling me all the time to up-sell me something, etc....

So, congrats on your success!

 

[mickeyd]

The good news is that I am now mortgage free and can invest what I was paying in monthly mortgage amounts directly into my RRSP and that I really am not too worried about my financial future.

This is an excellent short term as well as long term strategy. Most strategies can claim only one of those. Future investment opportunities are opened up due to the decreased burden of that monthly payment hanging over your head. This pretty much trumps all of the other possible "good things."

 

[Nords]

I figure that prepaying my mortgage rather than investing in the market has cost me somewhere between $25-$40K....

I think you're one of the very few posters who's ever attempted to put a price on being able to sleep well at night.

I've never heard of anyone having trouble sleeping because they were out of the stock market...

 

[megacorp-firee]

I've never heard of anyone having trouble sleeping because they were out of the stock market...

On the contrary, we've heard plenty of people who 'warn' against being out of the market... being out of the market on the best 10, 20, or 30 days cost you a lot.

So for the long term buy and holders ... being out of the market may cause some insomnia ...

just a contrarian opinion.

 

[SamHouston]

It was paying off the mortgage early that allowed me to retire when pushed out the door of the office in March rather than having to go back to work the way that almost all of the other 300 of my co-workers pushed out that day had to do.

That benefit, plus the "security" that I felt by owning my housing free and clear, made it the right decision for us. I know that the numbers don't tell the same story, but I don't regret having done it this way.

 

[accountingsucks]

It was paying off the mortgage early that allowed me to retire when pushed out the door of the office in March rather than having to go back to work the way that almost all of the other 300 of my co-workers pushed out that day had to do.

That benefit, plus the "security" that I felt by owning my housing free and clear, made it the right decision for us. I know that the numbers don't tell the same story, but I don't regret having done it this way.

This is honestly the reason why I wanted to be debt free ASAP. I've already been canned from 2 jobs in my nine year career. In one case I had a horrible workaholic boss where we basically agreed to part ways after being "talked to" and in the other case my salary vs chargeable hours ratio dropped below the "required" amount in publlic practice and I was one of a few people let go on the same day. Those two experiences have really tainted my relationship with work and I will never really be able to trust anyone I work with again. They tell you one thing one day and the next you are expendable. Quite frankly I don't want to be a lemming for the next 20 years...no matter how high you go in a company you will always have a boss. Even at the CEO level you have shareholders to answer to.

Having no mortgage means if I lose the job, I can cover my expenses with employment insurance as I live frugally on about $1300 a month. I never want to have to worry about where I'm going to get the money to pay my next mortgage payment........

Someone mentioned borrowing for investing....yes in Canada that is tax deductible. Leverage works great if your investments go up, but if they drop it can absolutely destroy you. I have one friend who got a HELOC on his home and invested it in an oil and gas play (without telling his wife). Luckily the stock did go up, but probably only enough to pay the interest on the loan. In my mind, investing in the market is like buying a car...if you can't pay for it in cash, you can't afford it.

 

[Coach]

Looking back though, if I knew what the markets would be doing in the last 5 ....

Hindsight is 20-20 -- you could have easily come out $30K the other way if the market hadn't been so favorable.

I think you made a perfectly reasonable choice. Getting greedy can be dangerous.

Coach

 

[TromboneAl]

How being conservative probably saved me $30K

I have always been a "pay your mortgage off ASAP type person" and at the age of 31 I was able to pay the $102K mortgage on my $185K home off after being in the home about 5 years. I did invest in my company RSP (similar to US 401K basically) plan, and my own, but only to the tune of about 10 - 15% of my income....everything else went to prepay the mortgage at renewal or on anniversary dates.

Due to the stock market correction of 2004, The TSX index had a .4% compounded annualized return since 2002 which is when I bought my home. My mortgage was at around 5% during this time. Although I haven't done the precise math, I figure that prepaying my mortgage rather than investing in the market has saved me somewhere between $25-$40K.

 

[cute fuzzy bunny]

I think if you paid off your mortgage in 1999 like I did, you felt pretty good by early 2003. Last few years would make anyone who invested in anything other than equities feel like they came up a little bit short.

But its not really about the money lost. By having a comparatively minute set of monthly bills, I care a lot less about portfolio volatility and know I could squeeze by a long term bear market with no problems.

Strategically, I'm holding a far higher equity percentage than I'd feel comfortable with while holding a mortgage and needing to make that monthly payment. That strategic difference has made me a buttload of money over the last few years.

Wanna know how much? You do the math...figure the delta between a portfolio that was 50/50 wellesley/wellington and one thats 80/10/10 equities/6.25% cd's/5.15% money market...

You want to feel like a moron? Try being up to your eyeballs in a mortgage, having all of the funds from that in a high equity portfolio and doing all of this during the 1964-1975ish time period.

 

[scrinch]

Due to the stock market correction of 2004, The TSX index had a .4% compounded annualized return since 2002 which is when I bought my home. My mortgage was at around 5% during this time. Although I haven't done the precise math, I figure that prepaying my mortgage rather than investing in the market has saved me somewhere between $25-$40K.

What is this...some more of this revisionist history? Or are you saying that your hindsight is 20:100? Or is this one of those tales of what might have been?

 

[TromboneAl]

It's a tale of an alternate universe.

My point is that it's totally wrong to say that paying off the mortgage was a bad decision. If things had turned out differently it would have had a better outcome relative to the market.

IOW, the correctness of a decision can't always be judged by the outcome. If I took $100,000 of my money and spent it all on lottery tickets, would it have been a good decision? No. If I'd won a 90 million dollar jackpot, would it have been a good decision? No, it would have been a bad decision with a good outcome.

Was it a bad decision for AS to pay off the mortgage? No. Was the outcome bad? Yes.

One more example: I paid for fire insurance for out current home for 8 years, and there hasn't been a fire. Was it a bad decision? No. Would it have had a better outcome to put the money in the market? Yes.

 

[Arif]

Has your home appreciated any? If so then that might reduce that 30k opportunity cost of investing in the market.
I am building a house and paying cash. Being self employed it makes sense for us. If I was still in the Army with a steady income the choice would have been different. The difference in what I could make in the market and the cost of the house is what I am willing to pay to sleep well at night as well as be more agressive in my investments.

 

[farmerEd]

I'm in the pay it off as soon as you can camp. I paid mine of in 1999 and pulled money out of the market to do it..its not just the "peace of mind", which can sound trivial compared to the spreadsheets that some posters will rollout to "prove" that paying it off was/is a bad move.

In my own situation, once paid off (at age 35 and with 3 small kids at the time), it gave me the financial freedom to throw myself into a new business startup with little or no worries about the downside risk (i.e. having no work, a mortage to pay and a family of 5 to feed). So in my case, no matter what the market did after I pulled money out, it was a good decision (one of my best financial moves). With that peace of mind in hand my business thrived, I took risks that I might not have felt as free to take, and I er'ed soon after...5 1/2 years ago.

Other people, other situations (i.e. a steady predictable income) and a low mortgage rate, maybe it would have been better to keep the mortage - but for me, it was a no brainer.

 

[accountingsucks]

Has your home appreciated any? If so then that might reduce that 30k opportunity cost of investing in the market.
I am building a house and paying cash. Being self employed it makes sense for us. If I was still in the Army with a steady income the choice would have been different. The difference in what I could make in the market and the cost of the house is what I am willing to pay to sleep well at night as well as be more agressive in my investments.

Yes, home was 185K, and a recent evaluation pegged the value at 500K...this is in Edmonton where house prices are outrageous in my opinion now. Crappy 2 bedroom condos are going for 250K. One thing for sure is that I bought at the perfect time as 2003ish is when prices went out of control. Some of the employees I supervise are just starting out making 40K a year and buying 400K houses....they are really scraping each month to get by even with a spousal second income.

 

[Gumby]

No, it's only had approx a 13% annual rate of return for the 5 years previous to March 31, 2007).

But, I understand your point. Still, your decision was not a "bad" or "wrong" one. Based on the information available AT THE TIME (which is the only way the quality of a decision can be fairly judged) there was little reason to believe that Canadian stocks would do significantly better than your 5% mortgage rate. If the market would have tanked (and there was a potential it could), you'd have been very happy with your choice.

There's no real value in looking back, not even any lessons to be learned 9since the next time you need to make this decision the underlying conditions will be different). Keep moving forward. You've got a paid-for home and that should bring considerable peace of mind.

I concur. It is wrong to look at the situation with 20/20 hindsight as to the results. At the time you made the decision, no one could have predicted that the TSX would rise as it did. It easily could have dropped. By contrast, paying off the mortgage is the same as investing your money at the mortgage interest rate for the remaining period of the mortgage, with zero risk. (this from a guy who easily could pay off his mortgage but does not)

 

[kcowan]

Also AS, that mortgage interest is not deductible for you in your high marginal tax rate. A good rule of thumb is to always pay off non-deductible debt first.

I did the opposite but not through any foresight. Sold the big estate home, paid of the mortgage and rented a penthouse, putting the net proceeds in the market. That decision has enabled me to retire early.

 

[cute fuzzy bunny]

What?!? You sold your house and made a lot of money from it, invested it and made more money from that?!?

Supposedly, this is an implausible outcome. You must be lucky.

 

[Meadbh]

Yes, home was 185K, and a recent evaluation pegged the value at 500K...this is in Edmonton where house prices are outrageous in my opinion now. Crappy 2 bedroom condos are going for 250K. One thing for sure is that I bought at the perfect time as 2003ish is when prices went out of control. Some of the employees I supervise are just starting out making 40K a year and buying 400K houses....they are really scraping each month to get by even with a spousal second income.

Let me get this straight. You have 100% equity in a $500K house which you bought for 37% of its current value, and you're complaining?

Suggestion: sell Edmonton house, move to New Brunswick and buy dream home for $200K. Invest $300K for FIRE, incurring no capital gains tax on sale of principal residence. Telecommute.

 

[haha]

Being conservative will always cost you money relative to a best case outcome. Conservatism shines during heavy seas.

Ha

 

[Arif]

Let me get this straight. You have 100% equity in a $500K house which you bought for 37% of its current value, and you're complaining?

My thoughts exactly.