It’s hard to fly with debt on your shoulders…
This is a continuation of Escaping the Death Pledge – The Plan
Let’s go back to May 5th, 2015. I woke up before the alarm, checked my bank account to make sure there was enough money to do what I wanted to do today, packed my lunch and headed to work. I thought I could wait until noon, but around 9:30AM I found myself sneaking out the back door to literally run to the bank. Payoff letter in hand I went straight to a teller who asked me what was it that he could help me with. Slightly out of breath I said “I would like to pay off my mortgage”. I’ve practiced saying this line in my head many times before but the real thing felt much more satisfying.
The bank was empty this early in the morning and other tellers sitting nearby all turned their attention to what was happening between me and their associate.
- You want to pay off your mortgage?
- Yes, please
- It looks like you refinanced $250,000 just 3 years ago
- That’s correct
- Are you refinancing with another bank?
- No, just paying it off outright
- Hmmm, I don’t see this happen very often… Congratulations, I guess?
- Thank you, I guess?
As we continued our conversation and as I remembered several other verbal Q&A’s about mortgage payoff, what struck me the most was how often people become confused. They’ll question the why and the how as if they simply must uncover the glitch in the Matrix that’s allowing this Energizer Bunny to unplug.
Think about it for a second… I’m talking about becoming debt-free and more often than not the first question people ask is – why? Why are you so hell-bent on getting rid of the “good debt”?
Don’t believe me? Just read through comments on any mortgage-related blog post and you’ll see what I’m talking about. The conversation quickly turns into a debate about what option is better – to pay off the mortgage or to invest more money in the market? Here is one and here is another and there are hundreds more.
Take a step back and ponder this on a more fundamental level. Don’t we all desire to be free? Do we not realize that we simply can not be free as long as we are in debt?
By definition debt creates a master and servant relationship. You pay, I collect. You don’t pay, I can ruin your life, at least financially. How did we get to the point where this basic premise is swept under a rug as a minor nuisance in a 30-year quest for “mortgage interest deductions” and “better market returns”?
In the last 3 years I sent a quarter of a million dollars to the bank instead of investing in the stock market. Look back 10 years and that number is just shy of half a million dollars. Knowing what we know now about market performance over that time period, would it’ve been better to invest that money than prepay a relatively low-interest mortgage? Yes. Do I regret it? Absolutely not!
First of all, the market could’ve just as easily tanked leaving me waiting for an eventual recovery to pull enough money to pay off the mortgage. Watching half of my portfolio evaporate during the Great Recession left a bad taste in my mouth. Sure we’ve been breaking all kinds of records since then, but somehow that doesn’t make me feel better since it only underscores market volatility in the short-term.
On the other hand, if the market went up, just like it did, I might’ve been reluctant to pull the money out “on the ride up”. FOMO (Fear of Missing Out) is real and I don’t know if I could pull the trigger. I’m much more comfortable setting a 3-year goal and sticking to it rather than trying my luck at a roulette table that is the market. Long term investments – market all the way but I won’t be gambling with my desire to be debt free!
Consider What You are Buying
“Buy experiences, not things” is a popular saying these days. Several studies confirmed that, dollar for dollar, spending money on experiences is a much better path to happiness than buying things.
I wholeheartedly agree! I remember and cherish the time spent with my family and friends doing things much more than buying things. I’ve had nice cars, motorcycles, watches, clothes, electronics and other trappings of a comfortable middle class lifestyle and in every single instance the initial excitement quickly faded. There is always another thing that promises the ultimate high to feed the vicious cycle of fleeting satisfaction.
When I looked at the choice between paying off the mortgage vs. investing in the market, I kept this first-hand knowledge in mind. I asked myself just one question:
What would I rather do with $250,000 – buy Experiences or Things?
Option A: Pay off the mortgage = Experiences
I wanted to experience being debt free. How do you know what it feels like to not owe anything to anyone if you’re in debt most of your life? How does it feel to have a recurring $2,000 monthly payment erased from the monthly expenses column? Would I feel more secure? Happy? Would I be willing to chase opportunities that seemed too risky before? Would it open a door to other experiences like my wife staying home with the kids if she wanted or a career change or a greater emphasis on travel and leisure? Would my priorities shift now that there was a whole lot more breathing room in the family budget?
Option B: Keep the mortgage, invest the surplus = Things (i.e. more money!)
By “surplus” I mean investing the extra money left over after paying bills and maxing out retirement plans. I’ve always maxed out pre-tax contributions whether I was prepaying the mortgage or not, so the question has always been what to do with the “surplus”. In this case, I could’ve invested the surplus in my after-tax brokerage account. Presumably (not guaranteed!) the market would beat the 3.25% interest on our mortgage so we would end up accumulating more money over the life of the loan.
It follows then, if we want to maximize the return we should continue executing this strategy for 30 years (i.e. full mortgage term), otherwise we’d be leaving money on the table. As a matter of fact, this is exactly the advice you’ll hear from most financial advisors.
Sure, you could try some other hybrid approach (split the surplus between the two options etc) but the fact is – it will always be a trade-off between getting out of debt sooner vs. having more money (not guaranteed!) at some later point in life.
Now forget about the numbers for a second. Which option sounds more exciting to you? What makes you feel all warm and fuzzy inside? What makes you happy?
I’ll go first. When I look at Option A what I see is excitement, opportunity and adventure. When I look at option B I see monotony and predictability. Committing myself to 30 years of mortgage payments feels strangely like work. It’s a straight exit-less road guaranteed to take you to a comfortable destination in a long one-way commute. I’m just afraid I’ll be numb, tired and old by the time I get there.
For me it’s a simple choice. Truth is, an extra hundred or two hundred or even a million dollars when I’m 65 will not make me happier. As any self-respecting FIREstarter I have a spreadsheet that projects our net worth 30 years in the future and beyond. We can stop contributing to our retirement accounts today and we’ll still have a comfortable lifestyle once we hit the magic 59.5-year penalty-free withdrawal age. Obviously we’re not planning on stopping our retirement contributions – which will only make this already comfortable number even more comfortable.
So remind me again why I should chase that elusive alpha in the market?
Option A provides tangible results now – not 15, not 30 years from now. Two thousand dollars in additional cash flow per month is a powerful force that will affect our lives immediately. How? We’ll just have to mull this one over in a future post 🙂
To be continued… Escaping the Death Pledge – The Ever After