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With the new blog post there is a lot of the above line stated in one way or another. There are additional similarly baseless arguments like liquidity/cash flow and paying the mortgage due to state of the market. And of course the oldie but goodie "guaranteed return".
I am 100% okay with people choosing to pay debts or whatever they choose to do. I simply dislike the half-truths and outright misconceptions people use to do so. Whats the larger issue is that people who probably do totally understand the trade offs, like WCI, end up using above aphorisms and people that do not fully understand pick it up and use it as their justification unknowingly. I wish that werent true but lets be honest, it is.
Paying off a debt either with larger payments or lump sum does not increase your liquidity. If lump sum it just reverses it from all at once to over time and changes where that money is located (both on the balance sheet and sometimes physically), ie, in a liquid place like a bank account into an illiquid one like your home. If the more aggressive approach it does nothing until the debt is fully paid. A more visual math example:
Example Lump Sum
Lump Sum=100,000
Debt payment= 1,000/month. 100k principal.
If you take your 100k and pay off the debt you do not "gain" any liquidity. You already have that liquidity in a big lump sum. You have 100 forward months of liquidity in the bank account right now. You are simply trading it for a payment of 1000/month going forward. You already have months/years of future liquidity on hand, youre simply trading off how its given to you. In the same comment stream people complain of escrow accounts of minimal value as giving "free money" to the bank, yet overlook the whole mortgage value as the obvious exact same kind of transfer.
Net result is negative given inflation and time value of money. 100k right now is worth more than 1k/month for the next 100 months. This is like why its more valuable to take the lump sum winnings in the lottery or why lump summing money into the market almost always wins long term. Same principle. Not a good reason to pay down a debt.
Money is fungible, simple vs. compound interest, and time value of money. These concepts cannot be stressed or learned enough, and even on this very enlightened forum we have seen it misunderstood time and time again.
Paying due to market state and not being able to pay your mortgage/bills
If being able to pay your mortgage is dependent on a typical bull/bear market state and not a depression/GFC level issue, than you cannot afford to own a home plain and simple or are too leveraged in general. This is simply a justification, not an argument.
"The math says, but..."
To me this is analogous to a pt saying, "I know what the doctor says, but...". How is it different and what are your initial thoughts about your patient that says such a line?
Why do we give ourselves such a pass and hold everyone else to such standards? How many people actually know the math they purport to have disregarded?
Guaranteed return
It is not a return. It does not grow. It is a fixed known quantity that is decreasing in value over time. You can only avoid the finance charge and only once. The best you can do is pay with cash. That comes with the standard opportunity costs that you would normally run. The difference with any debt is basically that same calculation plus the finance charge.
Simple/Compound Interest
Loans are simple interest. Market returns are compound. They cannot be compared straight across and when thats done it simply demonstrates a lack of understanding of the math and differences or willful spreading of such misinformation. Implications of this misunderstandings are huge.
Short term thinking
Comparing two long term issues like mortgage and retirement investing (if younger, obviously things change dramatically near retirement) to very short term issues like a correction or bear market. Its even more serious for short vs long term issues like student loans vs. retirement. Once the loan is gone that early choice to invest can compound for decades longer, decades.
Unless retiring soon, none of this should matter at all, and definitely have zero bearing on any of your debt/invest decisions. If you put into the market instead of the mortgage and the market goes down shortly thereafter it does not mean it was a bad decision nor will it impact which turns out to have been more wealth positive in the future. Its a red herring and exactly the kind of thinking this site should be trying to teach its readers to stop doing. Any thinking like this should line up with your personal timeline, expenses, etc....We should be thinking about terminal wealth and long term goals, not justifying behavioral issues with short term explanations that are wholly incongruent to the rest of the message (long term, no short-termism, etc....) If we are not to be concerned with let alone sell stocks in a down turn, why do we worry about other such frivolities?
Peace of mind, priceless
AH! As I've tried to point out time and again this is nothing more than an aphorism that sounds nice. Its not true, they do have a cost and we can get near to the exact dollar of the price. Sure its easier if you simply dont look for it to work out as such. Dont invest or make big life decisions based on pithy quotes, its irresponsible.
I am 100% okay with people choosing to pay debts or whatever they choose to do. I simply dislike the half-truths and outright misconceptions people use to do so. Whats the larger issue is that people who probably do totally understand the trade offs, like WCI, end up using above aphorisms and people that do not fully understand pick it up and use it as their justification unknowingly. I wish that werent true but lets be honest, it is.
Paying off a debt either with larger payments or lump sum does not increase your liquidity. If lump sum it just reverses it from all at once to over time and changes where that money is located (both on the balance sheet and sometimes physically), ie, in a liquid place like a bank account into an illiquid one like your home. If the more aggressive approach it does nothing until the debt is fully paid. A more visual math example:
Example Lump Sum
Lump Sum=100,000
Debt payment= 1,000/month. 100k principal.
If you take your 100k and pay off the debt you do not "gain" any liquidity. You already have that liquidity in a big lump sum. You have 100 forward months of liquidity in the bank account right now. You are simply trading it for a payment of 1000/month going forward. You already have months/years of future liquidity on hand, youre simply trading off how its given to you. In the same comment stream people complain of escrow accounts of minimal value as giving "free money" to the bank, yet overlook the whole mortgage value as the obvious exact same kind of transfer.
Net result is negative given inflation and time value of money. 100k right now is worth more than 1k/month for the next 100 months. This is like why its more valuable to take the lump sum winnings in the lottery or why lump summing money into the market almost always wins long term. Same principle. Not a good reason to pay down a debt.
Money is fungible, simple vs. compound interest, and time value of money. These concepts cannot be stressed or learned enough, and even on this very enlightened forum we have seen it misunderstood time and time again.
Paying due to market state and not being able to pay your mortgage/bills
If being able to pay your mortgage is dependent on a typical bull/bear market state and not a depression/GFC level issue, than you cannot afford to own a home plain and simple or are too leveraged in general. This is simply a justification, not an argument.
"The math says, but..."
To me this is analogous to a pt saying, "I know what the doctor says, but...". How is it different and what are your initial thoughts about your patient that says such a line?
Why do we give ourselves such a pass and hold everyone else to such standards? How many people actually know the math they purport to have disregarded?
Guaranteed return
It is not a return. It does not grow. It is a fixed known quantity that is decreasing in value over time. You can only avoid the finance charge and only once. The best you can do is pay with cash. That comes with the standard opportunity costs that you would normally run. The difference with any debt is basically that same calculation plus the finance charge.
Simple/Compound Interest
Loans are simple interest. Market returns are compound. They cannot be compared straight across and when thats done it simply demonstrates a lack of understanding of the math and differences or willful spreading of such misinformation. Implications of this misunderstandings are huge.
Short term thinking
Comparing two long term issues like mortgage and retirement investing (if younger, obviously things change dramatically near retirement) to very short term issues like a correction or bear market. Its even more serious for short vs long term issues like student loans vs. retirement. Once the loan is gone that early choice to invest can compound for decades longer, decades.
Unless retiring soon, none of this should matter at all, and definitely have zero bearing on any of your debt/invest decisions. If you put into the market instead of the mortgage and the market goes down shortly thereafter it does not mean it was a bad decision nor will it impact which turns out to have been more wealth positive in the future. Its a red herring and exactly the kind of thinking this site should be trying to teach its readers to stop doing. Any thinking like this should line up with your personal timeline, expenses, etc....We should be thinking about terminal wealth and long term goals, not justifying behavioral issues with short term explanations that are wholly incongruent to the rest of the message (long term, no short-termism, etc....) If we are not to be concerned with let alone sell stocks in a down turn, why do we worry about other such frivolities?
Peace of mind, priceless
AH! As I've tried to point out time and again this is nothing more than an aphorism that sounds nice. Its not true, they do have a cost and we can get near to the exact dollar of the price. Sure its easier if you simply dont look for it to work out as such. Dont invest or make big life decisions based on pithy quotes, its irresponsible.
Paying off debt absolutely provides you a benefit, the benefit of not having to make future payments, and the "return" is the benefit of not having to pay interest. Take business 101 and look up the definition of an asset and a liability. Take accounting 101 and you see that adding to or subtracting from either side affects your bottom line the same way. You are hung up on the idea of "guaranteed return" being false because you literally don't receive any return, i.e., any money or appreciation, like you would with a stock, bond or lemonade stand. I appreciate using the right word to describe things, but to suggest that there being no return means there is little or no value to paying off the debt is incredibly short-sighted. Having a debt paid off or receiving cash can both be a return. Paying off a debt doesn't technically give you a return, but not having to pay interest affects your bottom line the same way.
But suggesting that things like cash flow, liquidity, peace of mind, and the idea of a "guaranteed return" are fallacies, baseless, or are otherwise untrue aphorisms is ignoring many realities to blindly put you at the latter end of the spectrum. And Zaphod is by no means the only guy saying this stuff, it's a common theme on the blogosphere and in the business world in general.
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