How dumb was I?

[WealthyDoc]

DMFA wrote:

WealthyDoc wrote:

Good for you!

If that is dumb, be dumb and proud!

I have been debt free for a very long time and I have no regrets about that.  Having to make guaranteed payments to a person or financial institution every month takes money, time, and stress.  “The borrower is servant to the lender”  Many a nerd with a calculator showed me I’m “wrong” to pay everything off due to comparative interest rates… blah.. blah.  Those “helpful” folks have a lot less income, assets, and financial freedom than I do.

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I’m not arguing against the action. It’s never wrong to pay your debts. Just don’t lie to yourself about the math of doing it. Math is still math.

The equivalent percentage of compound annual gain from avoiding finance charges by paying a simple amortizing debt early is not its APR, more like half. That is *all* that I’m saying.

You can disrespect me by calling me a nerd and remind me of my low net worth all you want, but none of that changes the mathematical fact that paying a 3% debt is not the same as a guaranteed annual compound return of 3%. That doesn’t mean that investing it in equities is superior or paying the debt is wrong or dumb.

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Sorry, I didn't mean to disrespect you.  You always make great points here.  My net worth is more a function of how ancient I am, than my wisdom.  I wasn't even trying to refer to you.  There was a 20 yo who still lived with his parents who lectured me about how stupid I was to pay off debt.  I was thinking of him when posting.  I have to be more aware of my tone when posting.  I was trying to say that even though the math argues a benefit (I was stupidly trying to sound like Dave Ramsey referring to a nerd with a calculator but I can't pull it off like he can).  Sometimes listening to your internal stress level or not having obligations to pay or paying attention to behavioral patterns is as important or more important than comparative calculated rates.  Also debt payments are fixed and unavoidable but investment returns are variable and not guaranteed which is why I paid off all debts at the first opportunity.  I understand the benefits of leverage and probably should tone down my emphatic writing style here.

[DMFA]

WealthyDoc wrote:

DMFA wrote:

WealthyDoc wrote:

Good for you!

If that is dumb, be dumb and proud!

I have been debt free for a very long time and I have no regrets about that.  Having to make guaranteed payments to a person or financial institution every month takes money, time, and stress.  “The borrower is servant to the lender”  Many a nerd with a calculator showed me I’m “wrong” to pay everything off due to comparative interest rates… blah.. blah.  Those “helpful” folks have a lot less income, assets, and financial freedom than I do.

Click to expand…

I’m not arguing against the action. It’s never wrong to pay your debts. Just don’t lie to yourself about the math of doing it. Math is still math.

The equivalent percentage of compound annual gain from avoiding finance charges by paying a simple amortizing debt early is not its APR, more like half. That is *all* that I’m saying.

You can disrespect me by calling me a nerd and remind me of my low net worth all you want, but none of that changes the mathematical fact that paying a 3% debt is not the same as a guaranteed annual compound return of 3%. That doesn’t mean that investing it in equities is superior or paying the debt is wrong or dumb.

Click to expand…

Sorry, I didn’t mean to disrespect you.  You always make great points here.  My net worth is more a function of how ancient I am, than my wisdom.  I wasn’t even trying to refer to you.  There was a 20 yo who still lived with his parents who lectured me about how stupid I was to pay off debt.  I was thinking of him when posting.  I have to be more aware of my tone when posting.  I was trying to say that even though the math argues a benefit (I was stupidly trying to sound like Dave Ramsey referring to a nerd with a calculator but I can’t pull it off like he can).  Sometimes listening to your internal stress level or not having obligations to pay or paying attention to behavioral patterns is as important or more important than comparative calculated rates.  Also debt payments are fixed and unavoidable but investment returns are variable and not guaranteed which is why I paid off all debts at the first opportunity.  I understand the benefits of leverage and probably should tone down my emphatic writing style here.

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I beg your pardon for taking offense so easily. Cheers

[FIREshrink]

Over the last 5 years, the Vanguard target date retirement 2045 fund has a cumulative gain of 70%+. So in retrospect, paying off a sub 3% mortgage was pretty dumb.

Since you didn't know that ahead of time, you're forgiven. And no one knows what the next 5 years will look like.

Still, the odds favor increased wealth creation by investing, not paying off ultra-low tax-deductible loans.

I have a 3.6x% mortgage and plan to hold it every day of its remaining 29 years. I could pay it off now but see zero reason to do so.

[Dicast]

OP, forward progress is forward progress.  For those that are prodigious accumulators of wealth I do not believe the choice to be debt free vs building assets generally matters.  With so many years of saving the way you have already, you will likely have set in motion a lifetime of financially responsible decisions and probably won't know what to do with all your money on the back end.

[AR]

I think people go on a lot about the discipline it takes to pay down debt.  But there is also, for some people, discipline required not to pay down debt.  I'm one of those people.  I have a big, low-interest mortgage, that I could pay off.  I also hate having debt. However after doing the calcs like the ones DMFA has shown, I know that paying off the debt is not the best move for my long term net worth.  So, instead of throwing the extra cash at my mortgage, I just keep investing it.

And although this approach of paying less on my mortgage than I otherwise could seems easier, it still requires discipline: I don't make purchases I otherwise wouldn't (at least I think so, proving it is impossible) and I didn't buy more house than I could afford.  I just invest as much as possible and pay the minimums on my mortgage.  It's got a gigantic balance, which I'd love to wipe out and could do in a couple of years just by increasing my payments (or even faster by using savings).  That would make me feel better, but I would likely be poorer in the long run.  So, I don't do it, despite the peace of mind that being debt free would give me. I know that I need to forgo that piece of mind if I want to be better off.  That takes discipline.

[triad]

FIREshrink wrote:

Over the last 5 years, the Vanguard target date retirement 2045 fund has a cumulative gain of 70%+. So in retrospect, paying off a sub 3% mortgage was pretty dumb.

Since you didn’t know that ahead of time, you’re forgiven. And no one knows what the next 5 years will look like.

Still, the odds favor increased wealth creation by investing, not paying off ultra-low tax-deductible loans.

I have a 3.6x% mortgage and plan to hold it every day of its remaining 29 years. I could pay it off now but see zero reason to do so.

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actually, I paid just over the minimum for all but the last month.  I had a 100k lump sum from selling a rental property and used that to finish off my mortgage.  So the jury is still out on the result.  I'd be shocked if it turns out I didn't make the "wrong" choice though...

One advantage of paying it off is that I need less in an emergency fund and less in monthly income to maintain standard of living.  I could probably go down to 20 hrs/wk now which would probably increase my practice longevity by over a decade.

[White.Beard.Doc]

After torturing myself over this debate for many months, I decided to split the difference.  I put it all on autopilot to make it easy.

I'm investing a very large chunk of change each month after maxing out my retirement accounts. 50% goes to my main taxable account, 25% goes to a conservative asset allocation taxable investment account, and 25% goes towards paying off my 2.625% mortgage loan on my primary home.  I could write a check to pay off the mortgage today if I felt like it, but that doesn't quite feel right.

One of my investment properties has a modest balance mortgage at 3.375, but I don't pay that one off early. I recently learned that mortgage interest deductions on my personal residence get phased out for my extreme income level, but investment property mortgage interest is a write off against property rental income and that is a business deduction not subject to phase out. It simply reduces taxable rental income.

 

[wideopenspaces]

AR wrote:

I think people go on a lot about the discipline it takes to pay down debt.  But there is also, for some people, discipline required not to pay down debt.  I’m one of those people.  I have a big, low-interest mortgage, that I could pay off.  I also hate having debt. However after doing the calcs like the ones DMFA has shown, I know that paying off the debt is not the best move for my long term net worth.  So, instead of throwing the extra cash at my mortgage, I just keep investing it.

And although this approach of paying less on my mortgage than I otherwise could seems easier, it still requires discipline: I don’t make purchases I otherwise wouldn’t (at least I think so, proving it is impossible) and I didn’t buy more house than I could afford.  I just invest as much as possible and pay the minimums on my mortgage.  It’s got a gigantic balance, which I’d love to wipe out and could do in a couple of years just by increasing my payments (or even faster by using savings).  That would make me feel better, but I would likely be poorer in the long run.  So, I don’t do it, despite the peace of mind that being debt free would give me. I know that I need to forgo that piece of mind if I want to be better off.  That takes discipline.

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You know, I never thought about it this way, but you are totally right! It's super hard not to pay down the mortgage when you hate debt. I can't do it even knowing it's the "right" move financially- the psychological pull to be totally debt free asap is just too tempting for me. But strong work on putting the extra money you could put in to the mortgage in to your investments.

[Millbrown]

7-10 yr expected returns in the US stock market is around 1% at best at current valuations. I bet in 10 years, paying off a mortgage of 2.65% will look like genius. Plus, no ups and downs, no 50% drawdown trying to get a better return. I basically see paying stuff like this down faster as my bond portion of my portfolio but with a guaranteed return.

[FIREshrink]

Millbrown wrote:

7-10 yr expected returns in the US stock market is around 1% at best at current valuations. I bet in 10 years, paying off a mortgage of 2.65% will look like genius. Plus, no ups and downs, no 50% drawdown trying to get a better return. I basically see paying stuff like this down faster as my bond portion of my portfolio but with a guaranteed return.

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I believe you are quoting base on real returns, not nominal.

 

Since I can buy a 20 year EE bond that pays 3.5%, it seems that paying off a 2.x% mortgage over 20 or fewer years would be far from genius.

[Zaphod]

FIREshrink wrote:

Millbrown wrote:

7-10 yr expected returns in the US stock market is around 1% at best at current valuations. I bet in 10 years, paying off a mortgage of 2.65% will look like genius. Plus, no ups and downs, no 50% drawdown trying to get a better return. I basically see paying stuff like this down faster as my bond portion of my portfolio but with a guaranteed return.

Click to expand…

I believe you are quoting base on real returns, not nominal.

 

Since I can buy a 20 year EE bond that pays 3.5%, it seems that paying off a 2.x% mortgage over 20 or fewer years would be far from genius.

Click to expand...

And lets recall paying a mortgage down is a fee avoidance, not a return. Simple interest, not compound. Its a one time event. Also ignores the idea of inflation helping to eat away at the real cost of your payment down the line, and that your dollars are worth more today than they will be in 10-20 years and therefore its actually very expensive to pay down such a loan.

[Complete_newbie]

Zaphod wrote:

FIREshrink wrote:

Millbrown wrote:

7-10 yr expected returns in the US stock market is around 1% at best at current valuations. I bet in 10 years, paying off a mortgage of 2.65% will look like genius. Plus, no ups and downs, no 50% drawdown trying to get a better return. I basically see paying stuff like this down faster as my bond portion of my portfolio but with a guaranteed return.

Click to expand…

I believe you are quoting base on real returns, not nominal.

 

Since I can buy a 20 year EE bond that pays 3.5%, it seems that paying off a 2.x% mortgage over 20 or fewer years would be far from genius.

Click to expand…

And lets recall paying a mortgage down is a fee avoidance, not a return. Simple interest, not compound. Its a one time event. Also ignores the idea of inflation helping to eat away at the real cost of your payment down the line, and that your dollars are worth more today than they will be in 10-20 years and therefore its actually very expensive to pay down such a loan.

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Sigh. People just do not get simple interest vs compound. Totally agree.

2nd - eh who cares what people think - do what we think is right. Depends on risk tolerance. To majority on this board, 5% debt is OMG! pay it down! That's fine because their frame of reference, or r (in the IRR calc if you will) is the stock market.

For entrepreneurs or businessmen, they re-feed the business with an r much higher than that. I can care less about 8-9% debt at this point.

[StarTrekDoc]

Inflation. Exactly. Today's dollar is a lot more worthy for me invested than a dollar paid thirty years from now.

This thought of invest now in low moderate risk vs 30 yrs mortgage payments always perplexed me. I completely understand that sleep better and need for discipline for fiscal restraint instead of spending, but that's 101 stuff vs the level of 200k+ dollars.

[Zaphod]

StarTrekDoc wrote:

Inflation. Exactly. Today’s dollar is a lot more worthy for me invested than a dollar paid thirty years from now.

This thought of invest now in low moderate risk vs 30 yrs mortgage payments always perplexed me. I completely understand that sleep better and need for discipline for fiscal restraint instead of spending, but that’s 101 stuff vs the level of 200k+ dollars.

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I always frame it to friends that discuss it as hurrying up and spending money asap to avoid a 50+% discount in the future. I think one would sleep well at night if they really go over it, understand it fully, and have an investing plan for the money that they stick with.

I certainly wouldnt sleep well if I was prepaying my mortgage in lieu of more investing, I would be having nightmares of lighting money up in flames.

Im very early in my investing career and realize that this dynamic can be very different for the early accumulator vs. someone who already has enough or more. Though if some bank gives a 90 year old a no estate strings attached mortgage I wouldnt blame the 90 year old.

[Drsan1]

DMFA wrote:

People need to quit calling paying off amortizing debts with simple interest of X% “a guaranteed return of X%.” It’s not. That’s not how math works.

You’re only gaining what you would have paid in interest. Since the principal is decreasing throughout, you’ll only end up “losing” about half the interest rate for the term of the loan.

For the sake of example, take repayment on a 15-yr fixed loan at 2.65%; that’s simple amortizing interest. We’ll use $300,000 for ease. Excel’s =cumipmt function gives the cumulative interest between two periods, in this case, 1 through 180. =cumipmt(2.65%/12,120,300000,1,180,0) = $63,891.60, a total of 21.3% over 15 years; annualized, that’s 1.213 ^ (1/15) = 1.30%, just under half. Such demonstrates both the time value of money and the power of compounding vs simple. That number over time will probably not even beat inflation, let alone p much any investment vehicle…how does 1.3% compare to any given index over that time frame? That’s like a 1-year CD.

…and then there’s the fact that mortgage interest is a tax deduction. This basically equates to reducing your interest rate by your marginal income tax rate. If you’ve been able to pay off a 15-year note in 5, you’re probably in at least the 33% bracket if not higher. Hence, the mortgage is at 2.65% · (1 – 0.33) = 1.78%. Then, you can even factor in inflation, but that would temper any investment gains as well, so prob best to leave that out.

However, that being said, there are many reasons why paying off any given low-interest debt or mortgage can still be advantageous, even if it is more likely to beat it even with a (very) conservative investment strategy. If you need credit, or if you’re close to retiring, or need financial independence, then it can still benefit you. Some people need to see zero in their liability column to keep sane, I guess, as well.

So you’re not really *wrong* or *dumb* as you might say, though in all likelihood you would have done better even in some very low-risk investments (even CDs, in this instance). At least the “gain” is “guaranteed,” though then you place it at risk with whatever you do with the resultant extra cash…but that’s pretty much a constant.

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Wow you are smart