Escaping the Death Pledge – The Reasons

mortgagereasons

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.

Dig Deep

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

 

17 thoughts on “Escaping the Death Pledge – The Reasons

  1. It’s a shame that redeeming a mortgage is now so rare that the quaint American custom of the mortgage burning party has gone by the wayside.

    I redeemed mine early, and though in an intellectual way it is/was a dumb thing to do, the experience is otherworldly. Being totally debt-free is a very, very odd feeling in the modern world.

    • Congratulations on being really debt free with non of that “I’m debt-free except for my mortgage” BS! It’s great to hear from those that have paid off their mortgage and have no regrets no matter what everyone else says. Personally, I finally feel like that bird in the picture!

      • The personal finance world seems to be getting taken over by folks ruled by head rather than heart. They seem in thrall to the total return – but it’s also about the ride along the way.

        For sure, emotions can lead you a long way wrong in PF, but in the end you are choregraphing a life, and the used of crystallised power in the form of money is part of the resources. For sure, I (and probably you) won’t maximise the total return. I’ve done even worse because I suffer an income suckout until I am old enough to get a hold of my tax-advantaged pension savings. Keeping the nortgage would have allowed me to run down more savings and then fill up from pension savings, and intellectually would be the right way.

        But I’d rather be free and have a lower income for a few years than have the feeling that a stock market crash could send me back to work. I am done with working for a living – three decades of working for the Man is enough.

        As I get older I prize comfort over speed. I can’t take the increase in total return with me at the end. I don’t have to fret about interest rate rises and nobody can turn me out of my home. That’s worth paying an opportunity cost for IMO, and I congratulate you on achieving this two decades earlier in life than I did. Props to you, sir!

        • I think that in this reply, perhaps indirectly, you’ve touched upon another important concept – the concept of “enough”. I brought up the same idea at the end of my post since I think this is something that each of us needs to have a good handle on as we toil away in the accumulation phase. It’s important to be able to realize the moment when “one more day”, “higher ROI” etc. stop adding value in the long run. The day when you have enough.

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  3. Enjoying this series of posts very much!

    I have to say that in your situation I would have done exactly the same thing. To be able to max out the tax advantaged accounts and still have enough money to pay off the mortgage in just 3 years is quite spectacular… congrats!

    I don’t think I’ll ever be in that position though (partially because our tax advantaged account limits are much higher, partially because my income, well it must be lower I am pretty sure!)

    So this does become a bit of a conundrum for someone with only limited resources to either pay off the mortgage earlier OR try to invest for a better future.

    So far we’ve not made any mortgage overpayments but I think that may change soon because *surely* there is another crash coming soon for one, and as ermine points out interest rates can and surely will rise at some point (although we’ve been saying that for years haven’t we?). I think for me the best strategy is to create some sort of dollar (or pound) value averaging between the investment portfolio and the mortgage balance, so I am kind of rebalancing between the two. Obviously the mortgage paydown is known (I guess unless/until rates rise at least) so it will just depend on how the market does. If it goes down, then I make more payments into investing accounts, if it goes up, then more go into the mortgage.

    Obviously this is completely ignoring all the excellent points you’ve made in your post about happiness and the great feeling of being debt free, but as I cannot fill my tax advantaged accounts as you have I feel I must at least take some advantage of those as they are such a great deal.

    Cheers for the link by the way and looking forward to the next post in the series! 🙂

    • Your plan sounds good! I think that those of us who ponder the question of early mortgage payoff vs. additional investments need to realize first and foremost that we’re in a great position already. Whatever you choose you’ll come out ahead because most people don’t even get to ask that question (for various reasons). After that realization, I found that taking a step back and figuring out what would make me happier was a key to braking the tie and getting the ball rolling in the mortgage payoff direction.

      Good luck with whatever strategy you decide to pursue!

  4. Interesting post. I think you’re right about how paying off a mortgage is an experience and–at the moment–one that few get to experience.

    Really plenty to ponder on. I look forward to catching up with your other posts. Very glad the FireStarter highlighted your site.

    • “One that few get to experience”… Or experience it way later in life when it might not even matter that much anymore. If I kept the mortgage into my 60s (**shudder**) I doubt I would be feeling as elated as I do now. By that time I hope to be set financially and paying off a mortgage wouldn’t feel so liberating. Plus, I get 20 extra years to savor that feeling all while embracing the opportunities that only Zero Debt can bring.

      Thank you for stopping by!!

  5. Pingback: early mortgage pay off vs extra investment strategies - theFIREstarter

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  7. Fascinating to read your progress and how it turned out. This is very close to what is going through my mind at the minute, what is best? I was almost mortgage free on my old flat (in London!) a few years ago, however we decided to upgrade to a larger place, so now back to having a significant mortgage, so do I pay down or invest? I keep going round in circles, but in effect I am doing a combination!

    1. Maximise my pension contributions. In the UK you can put up to 40k a year in pre-tax. Im not quite able to put that much in 🙂
    2. Maximise my ISA. I am trying to put in the full 15k post tax income in there, but its a challenge
    3. Maximise my other half’s ISA. We only started to put money in this year. I am now putting any payrise I get into this, and my compromise was that I take out the income it generates, and that goes off the mortgage
    4. Additional mortgage payments. We are at the start of a long mortgage since we moved, so I have started to chip away at the mortgage with some overpayments as I know its the early days that make the biggest difference.

    Would I like to be mortgage free? Hell yes 🙂 But if I can keep building up investments that in effect cover my mortgage payments, then when the mortgage is gone, wow I will be able to have some fun 🙂

    • Personally I would make sure to max out that 40K pension plan first. It’s hard to beat the tax savings you’ll get by going this route (at least if it works similarly to what we have here). That’s exactly what I did before ever sending a cent extra to my mortgage bank. But either way it sounds like you’re in a great position if you are asking these questions!

      • The problem with maxing out the 40k is that i cant access it for another 17 years and there is a lifetime cap of 1 milli9n which i would easily hit by then and the isa is a max of 15k per year so if i were to stop pension in years i would struggle to use up all the extra hence that way around 🙂 as my pay goes up or if i get lucky and have a bonus then i may put more in but i also need to ensure that i trust the government not to keep changing it further 🙂

        • I’m not sure if this strategy will work in the UK, but here we can access our pre-tax money before the age of 59.5 AND not pay any taxes with a Roth IRA conversion. Several bloggers explained this in detail so I’ll just post the summary from GoCurryCracker:

          “If we follow normal tax advice during our working days, we will retire early with a 401k or IRA or two. Except under special rules, this money can’t be spent until we turn 59.5, upon which it is taxed. But there is a way to avoid this, by converting it to a ROTH IRA. Withdrawals from a ROTH IRA are tax free for life.

          Once we’ve chosen leisure over work, we can convert our 401ks and IRAs to a ROTH IRA, a small amount each year. Any dollars converted to a ROTH are considered income, but we can earn up to $19,500 a year and pay no tax. The Mad Fientist explains more in a great post on his blog.”

          One we have enough in our pre-tax accounts to say goodbye to full time jobs I plan on doing just that. Maybe you have something similar?

          • Hi IS,

            Its not quite the same here – sadly if its in your pension then you can only access it if you take a 55% tax hit before your personal pension age – I know a number of the UK bloggers have written about this, but its a downside of the UK system. The reason I dont want to throw everything into it is that the government here keep changing the goal posts. To give you an idea – when I first started work (about 17 years ago… gulp!) there was an annual contribution limit of I think it was 255,000, no maximum value and you could take it at age 50. Since then the maximum you can save has been brought down first to 1,800,000 then 1,500,000 then 1,250,000 and I think next year it will be 1,000,000 and the most you can contribute in any one year is now 40k. The age for me has also gone up to 57, so another 17 years who knows what will happen, but they are muttering about increasing it further so I could end up being 60 before I can access it. As it stands, if i dont increase my contributions at all, and the fund grows at 5% p.a. I will still hit the 1 million limit mid 50’s before I can actually take it.

            At least with our ISAs the various governments have been consistent in getting them better and better, and means it will be tax free income 🙂

          • “The reason I don’t want to throw everything into it is that the government here keep changing the goal posts” This would drive me nuts! Anything can change in the US too, but so far at least no one is talking about messing with people’s retirement accounts. Your strategy makes perfect sense given the uncertain situation with pre-tax savings in the UK.

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