Good Debt Bad Debt

[Nicholas Carter]

Your debt is an emergency, which is why you should be using it as an emergency fund. People let their debts linger too long, but only a fool would pay off their mortgage early.
It seems like the more I read about FIRE proponents, the more I see this idea that some kinds of debt are not a problem, and that you should be happy to end the year with no liquid assets, as long as you've spent yourself into debt on the right things.
So what do you think? Is every kind of debt something you should be eliminating, and if not, how do you decide whether this is 'emergency' debt or not?

[the_fixer]

In my mind debt is detrimental to fire and mustachian life as the more debt you have the higher your income needs to be inorder to service the debt.

For example if you have a modest house, car and lifestyle with 0 debt how much money do you really need? If the market tanks and you need to avoid withdrawing as much money you can cut everything to the bone and withdrawal as little as possible.

However say you have a modest house with a $270k mortgage @ 4% here in Colorado, a 15k car loan @ 0% interest and 10k in school loans @ 5%

Instead of paying down the mortgage, car and student loan over the last 5 years you invested the money.

Suddenly we hit 2008 again, stocks are in the tank, you still need to make the payments on the debt and any withdrawals are at a discounted amount so you do not have the option to avoid sequence of withdrawal from eroding your investments.

Additionally having the ability to control your income and keep it low allows you to adjust it to qualify for ACA where if you have to withdraw a larger amount to service debt you do not have as much flexibility.





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[Retire-Canada]

Suddenly we hit 2008 again, stocks are in the tank, you still need to make the payments on the debt and any withdrawals are at a discounted amount so you do not have the option to avoid sequence of withdrawal from eroding your investments.

And as the cFIREsim math has shown again and again over a 30yr period including major crashes like this ^^^ investing the money is less risky than a typical 4%WR and you are going to come out ahead virtually all the time.

[the_fixer]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

I believe it will but I can only control what is within my control such as not carrying debt into FIRE and realizing from past experience that when the economy is doing bad it affects everything including jobs, cars and housing.

If you are going to carry debt into FIRE it would seem that you would need to have a larger fund to service the debt @ a 4% withdrawal rate VS being debt free with a 4% withdrawal rate and probably ends up being a wash as to how much you have to save in total.



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[Retire-Canada]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

These simulation include the great depression, both world wars, all sorts of financial calamities. They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

[the_fixer]

I understand the math and that it typically works out better to invest VS paying down low interest debt.

So did Pete AKA MMM leverage everything to get where he is?

Maybe MMM is not 100% about optimizing everything to the penny at the expense of building a low stress, low risk and low impact life?






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[Retire-Canada]

Maybe MMM is not 100% about optimizing everything to the penny at the expense of building a low stress, low risk and low impact life?

That's ^^^ a fine perspective, but not what you initially said and not what the OP asked. I was just correcting the factual error in your post. If you don't want to hold any debt because it makes you feel better I have no argument with that.

[boarder42]

I understand the math and that it typically works out better to invest VS paying down low interest debt.

So did Pete AKA MMM leverage everything to get where he is?

Maybe MMM is not 100% about optimizing everything to the penny at the expense of building a low stress, low risk and low impact life?






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Pete was living in a different time with much higher rates. He also doesn't have to be optimal at all anymore bc this blog brings in piles of cash. The Pete didn't do it reason is a bad reason.

Also typically it is better is a massive understatement. The person paying down their mortgage is basically looking for a needle in a haystack if they're expecting to come out ahead.

Also your 2008 comment is laughable bc the person who was investing would have far more money to maintain their lifestyle if the scenario you presented happened. The house must be 100% paid off for it to MAYBE be a better situation and that's a big maybe.

[the_fixer]

Not sure what your problem is boarder but anytime this subject comes up you automatically chime in with your abrasive attitude.

Maybe step off your soapbox and realize that just because you are passionate about the mathematics that does not mean that debt is good for everyone, every situation or at all times.

All debt carries risk, a heloc can be called rates can change shit happens in life at the worst possible time not in some magic mathematical vacuum.



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[boarder42]

Not sure what your problem is boarder but anytime this subject comes up you automatically chime in with your abrasive attitude.

Maybe step off your soapbox and realize that just because you are passionate about the mathematics that does not mean that debt is good for everyone, every situation or at all times.

All debt carries risk, a heloc can be called rates can change shit happens in life at the worst possible time not in some magic mathematical vacuum.



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Bc of my inbox full of thank you emails for doing this.

It's funny you mention HELOCs bc most people who pay down their mortgage like to use these as a way to get access to the cash they dumped into a fixed hard to move asset vs investing and having access.

[boarder42]

I've also never said it's good for everyone all the time I've frequently said if it doesn't make math sense then someone shouldn't do it. I don't advocate for keeping 10% mortgages.

[the_fixer]

Maybe MMM is not 100% about optimizing everything to the penny at the expense of building a low stress, low risk and low impact life?

That's ^^^ a fine perspective, but not what you initially said and not what the OP asked. I was just correcting the factual error in your post. If you don't want to hold any debt because it makes you feel better I have no argument with that.

I stand by everything I have posted, debt cannot become an emergency if you do not have any.

When looking at it from purely a mathematical perspective investing vs debt free works  dependant on the interest rate and other factors but that leaves out life and the human element.

If we could take the math of all of the people over that 30 year period and introduce the variables that happened to them (spouse dying, cancer, getting laid off while the economy is bad) we would see the real picture. I am sure for some it works out great while others ended up on the street.

Kind of like actuary tables do not rely simply on if your age they take into consideration if you smoke, male, female and your level of education among many other things.


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[boarder42]

You still don't get the point. If any of those events you posted about happen prior to the house being 100% paid off you're up shit Creek way faster if you were paying down a house vs investing.

Not paying down low fixed debt and investing  is more likely to work out for more people than doing the opposite. It doesn't work out for some it works out for most.

[Retire-Canada]

I stand by everything I have posted, debt cannot become an emergency if you do not have any.

Holding the debt [particularly in the form of a long term low interest mortgage] and investing the money makes your retirement safer not riskier as you are trying to suggest. I don't think you do understand the analysis behind this choice. The two things that cause FIRE failure are 1) poor early sequence of returns risk and 2) inflation impacts. That mortgage and the stocks use used the equity to buy are both excellent mitigation of the inflation risk.  You can eliminate the early sequence of returns risk as well simply by holding a portion of the home equity [say 20%] in inflation protected vehicles and investing the other 80%. This will bring your success rate to 100% against historical data and still provides most of the investment upside.

[Nicholas Carter]

They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

I'm confused. If inflation goes up, won't my (non-fixed) interest rates also go up at the exact same rate? Is the assumption here that the debt should only be taken on if it's fixed-rate, and otherwise is a deal-breaker?

[rantk81]

Here we go again!!!

[Nicholas Carter]

Here we go again!!!

Chop wood, carry water.

[Raenia]

Whether debt is good or bad hinges on several things:
1. Interest rate?
2. Fixed or Variable?
3. Callable?

Mortgages in the US are typically low interest, fixed rate, non-callable.  This is good.
Credit card debt is typically high interest, variable rate, often callable.  This is bad.
HELOC debt is typically higher rate than mortgages, but lower than credit cards, variable rate, and callable.  This is better than credit card, but worse than mortgage.
Student loans can be high or low interest, fixed or variable.  Payoff decision should depend on these factors.

Etc.

[OurTown]

Also if your debt payments are just consuming your cash flow, it's bad.

[tooqk4u22]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

These simulation include the great depression, both world wars, all sorts of financial calamities. They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

I stand by everything I have posted, debt cannot become an emergency if you do not have any.

Holding the debt [particularly in the form of a long term low interest mortgage] and investing the money makes your retirement safer not riskier as you are trying to suggest. I don't think you do understand the analysis behind this choice. The two things that cause FIRE failure are 1) poor early sequence of returns risk and 2) inflation impacts. That mortgage and the stocks use used the equity to buy are both excellent mitigation of the inflation risk.  You can eliminate the early sequence of returns risk as well simply by holding a portion of the home equity [say 20%] in inflation protected vehicles and investing the other 80%. This will bring your success rate to 100% against historical data and still provides most of the investment upside.

Yes - the math is right on this including the returns and inflationary reduction aspect.  The main problem is that the analysis is based on a static element that a 30 year mortgage is maintained.  The problem is that the majority of people don't maintain 30 year mortgages primarily due to life events - upsizing, downsizing, moving to another area for work or retirement, job change, refi, etc, which is why the 30 year mortgage is priced (excluding premiums for risk/return) more in line with 10 year treasury rates and not the 30 year rate.  Due to these life events the average mortgage is historically is only outstanding for 7 years - and because the rate is reset at the event it becomes more like a variable rate.  And the math only applies in the US as to my knowledge it is the only place you can get a 30 year fixed rate mortgage. 

It is likely that if the math was run with a 7-10 year fixed rate mortgage there still might be a benefit but it won't be near as much.

The other thing the math doesn't pick up is relative risk - paying off mortgage is a guaranteed return.  Investing in the market is not.  So there should be risk premium that is deducted form the expected return to see if the math works.

The liquidity argument is somewhat BS bc if you are FIRE liquidity should be an issue.

They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

I'm confused. If inflation goes up, won't my (non-fixed) interest rates also go up at the exact same rate? Is the assumption here that the debt should only be taken on if it's fixed-rate, and otherwise is a deal-breaker?

Yes - fixed rate for 30 years, only available in US. 

[Scortius]

They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

I'm confused. If inflation goes up, won't my (non-fixed) interest rates also go up at the exact same rate? Is the assumption here that the debt should only be taken on if it's fixed-rate, and otherwise is a deal-breaker?

Each scenario is different and it's important you look at all the variables when you make your decision. Most of the discussion of 'good debt' is centered around non-callable fixed rate 30 year mortgages at or below 4%. In those cases, the answer is no, they do not go up with inflation, which is why keeping them can be such a powerful tool. This is especially true if you have tax-advantaged space to put the money instead (IRAs, 401ks, HSAs, etc)

Things get murkier with adjustable rate debt, callable debt, and higher rate debt. If you have the ability to pay off an adjustable rate debt but the rate is currently low, it may make sense to 'let it ride' until the rate increases.

[the_fixer]

I have said zero debt vs carrying debt.

My personal case

FYI I am in the do not pay down your mortgage thread with a fixed 2.875 and pumping ridiculous amounts of money into a mega backdoor Roth maxing the IRS limits and then some.

I am not in a hurry to pay off the mortgage and have made no extra payments except letting them apply an overfunded escrow towards the principal.

When I go to FIRE I will either work OMY and pay off the mortgage or pull money out of investments to pay it off to be 100% debt free.

Would I make more in the long run by not paying it off, drawing a HELOC and dipping into equity most likely but that is not something that I am willing to risk. I feel I have mitigated the major risk of being in the middle of paying off a house by investing the money until FIRE and shoving a large lump sum at it to have a free and clear house.

All debt carries risk



   

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[SwordGuy]

Good Debt:

A horrible term that's subject to abuse.

Here's my definition of Good Debt:

"Good Debt is debt that you are paid to have at a guaranteed profit."

Example:  Get student loans at 3% and buy US Treasuries with those loans that pay 5%.

Obviously, this is hard to do.   But it is "Good Debt".


Acceptable Debt

Acceptable Debt has a reasonable chance of improving your circumstances beyond that which it reduces your circumstances by its very existence.  Therefore, it must be appropriate in size to the gains it can reasonably be expected to produce and not have a downside that is likely to have terrible repercussions.  I.e., a game of Russian Roulette with $1,000,000 per spin has a 5/6ths chance of getting rich and a 1/6th chance of dying.   Great upside but unacceptable downside! 

Example:  Student loans of $30,000 that will likely lead to a position paying $50,000.

Not an Example:  Student loans of $180,000 that will likely lead to a position paying $30,000, or which only have a 1% chance of getting into a decently paying position.

Example:  A fixed rate, 30 year mortgage at 2.75% on a dwelling that is at an affordable price, where inflation is expected to average 3% a year.

Not an Example:

Bad Debt

All debt is assumed to be bad debt unless proven otherwise.

[PiobStache]

It's hard to get rich squirting a large part of one's income into an asset that produces no income.  Not impossible, but you better be knocking down 300+ k a year so you can both buy that mortgage down as well as max all the available tax advantaged accounts and more.

[Seadog]

It's hard to get rich squirting a large part of one's income into an asset that produces no income.  Not impossible, but you better be knocking down 300+ k a year so you can both buy that mortgage down as well as max all the available tax advantaged accounts and more.

Are you talking about a house? Because income doesn't need to be in the form of cash. Are two ppl, one with a million dollar portfolio that produces 40k to fulfill their needs, and someone with a million dollar farm, which provides shelter, meat and veggies, and transport (ie all your basic needs like the Amish) considerably different?

Good debt is any debt that can be arbitraged into higher returns. Unfortunately that is almost never a certainty due to the gyrations of the market and economy etc. It doesn't mean that you can't take advantage of artificially low rates from things like student or mortgage loans to do so with high likelihood. However, once you have all your needs met, whats sort of the point? You'll simply be accumulating money faster for no purpose, but have a very sight risk of super high stress and catastrophe. Like MMM will not live different with more money, so there is no upside, only an (albeit very slight) downside. It's like minimizing your tax deductions so you get a few k of interest free money over the year. Best case is you make a small return, worst case is you completely fuck yourself when you can't pay the gov't.

0% debt isn't good debt, because frankly it's a bit of a lie. It's like a buy one get one free special. The cost of the second isn't 0. Someone is paying for it, and the cost is baked into the first one that's artificially high - so high that someone who only needed one of whatever would never buy it there. Same thing here. If you have 0% financing, you overpaid for the car, because no matter what, extending 20k today into periodic payments over 5 years does have a true cost to someone, somewhere, and that gets passed on to the end user.

[LoanShark]

Tough call but I chose the retire debt early model...I get the opportunity cost issue (8%>4%, etc)...but the guaranteed return of not having a mortgage was worth the peace of mind. Now it's just about maximizing cash flow to fund taxable investments. Keep in mind, my DW and I maxed out our 401K's while paying off our home over a year ago.

[GuitarStv]

It's hard to get rich squirting a large part of one's income into an asset that produces no income.  Not impossible, but you better be knocking down 300+ k a year so you can both buy that mortgage down as well as max all the available tax advantaged accounts and more.

My wife and I together have never made more than half the number you suggested but were able to pay off our mortgage while maxing out all available tax advantaged accounts (and indeed saving more as well).

[jlcnuke]

It's hard to get rich squirting a large part of one's income into an asset that produces no income.  Not impossible, but you better be knocking down 300+ k a year so you can both buy that mortgage down as well as max all the available tax advantaged accounts and more.

I don't make half that most years and max out my IRA, 401k, HSA, and put 5-figures into my brokerage account while paying down my mortgage....

Good debt - debt that saves you money, even if it takes a while to see that savings. A low-interest mortgage on a home you're going to stay in long-term is an example of this generally.
Debt that you pay no interest on, yet get something in return (i.e. CC debt that is paid off before interest is accrued while getting the CC rewards)

Bad debt - CC debt that incurs interest, irresponsible loans (for example, those $100k student loans for the degree in underwater basket-weaving, etc), etc.

[EnjoyIt]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

These simulation include the great depression, both world wars, all sorts of financial calamities. They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

You are 100% correct. The thing is 4% SWR is 96% affective. Plus this is over 30 years where one will not run out of money. This means at 30 years having $1 is still a success. For many of us who have well over 30 years to fund, losing significant value over long term is not an option which means we may have to cut spending for a few years during the recession especially if it is a prolonged one. That being said it is much easier to cut spending when you have a smaller footprint by being debt free. I plan on being debt free or very close to it when we FIRE.

[boarder42]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

These simulation include the great depression, both world wars, all sorts of financial calamities. They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

You are 100% correct. The thing is 4% SWR is 96% affective. Plus this is over 30 years where one will not run out of money. This means at 30 years having $1 is still a success. For many of us who have well over 30 years to fund, losing significant value over long term is not an option which means we may have to cut spending for a few years during the recession especially if it is a prolonged one. That being said it is much easier to cut spending when you have a smaller footprint by being debt free. I plan on being debt free or very close to it when we FIRE.

you're looking at it backwards.  Having the mortgage actually saves you from some of the risks involved with the 4% SWR.  so having a mortgage would lead to you not having to cut spending at all in some instances.  and for that matter refinancing every 10 years as long as rates are under 7% and pulling the cash out can lead to a 100% success rate historically.  Its tough to think about but its historically what worked.

[Nicholas Carter]

So it sounds like part of this is "In theory you'd expect paying off the mortgage early to work, because you assume that the mortgage will be totally paid off the next time the economy tanks. But practically speaking the odds are just as good or better that the economy will tank when you are ahead on the mortgage, but not finished with it. Putting more money in the mortgage makes the years where that happens more worse than ending the mortgage early reduces your chances of that happening."

[boarder42]

So it sounds like part of this is "In theory you'd expect paying off the mortgage early to work, because you assume that the mortgage will be totally paid off the next time the economy tanks. But practically speaking the odds are just as good or better that the economy will tank when you are ahead on the mortgage, but not finished with it. Putting more money in the mortgage makes the years where that happens more worse than ending the mortgage early reduces your chances of that happening."

No there are slim situattions less than probably 1% of paydown periods where you'd actually win paying down a low fixed rate mortgage vs. investing.  The natural human reaction and mine at one time was to think it was better to have a paid off house and the reasons many state are.

1. i can pump more into investments after its paid off - Yes but you missed the very high likelihood of coming out ahead investing instead of paying down regardless of the fact you're pumping more in later. remeber save early and often and let compounding do its job this applies here.
2. Not having debt is more secure - this is a large can of worms - if you expect to use the 4% SWR you actually have a higher probabilty of success in FIRE carrying a mortgage into FIRE.  It does make you run out of money sooner due to SORR in the years it fails but it still fails. 
2a. Often people site number 2 a lot as a reason for security in the event of a recession or job loss.  But what they are overlooking is during paydown you're at a much larger risk of total financial failure in the 2008 armagedon often quoted.  If i'm investing and you're pumping money into your house, your house cannot be easily liquidated to cover your expenses if you lose your job and the housing market crashes.  This assumption also ignore the gains on investing typically and still comes out way behind -  but my money is cut in half yeah but its doubled over the last 7 years so you're where you started.

In the end there are very few financially superior cases where a mortgage paydown is better than investing and even fewer time frames where the paydown time frame actually wins.  i prefer to bet on red and black on the roulette wheel not the sole green space.  and even this is an overstatement of the amount of times paying down a mortgage will occur over the right time frame. 

[Lmoot]

I love debt. But then again I’ve always had a good relationship with debt. Debt allowed me to move forward in my life, Debt has saved me money. Debt has earned me money, and allowed me to earn more money. Debt gave me the confidence to quit a toxic job, and allowed me the time I needed to regroup.

[EnjoyIt]

Over a 30 year period that may or may not happen exactly the same way again. If this is the case then why are people worried about sequence of withdrawal failures? Possibly because they can not control when the market goes up or down in relation to when they FIRE?

These simulation include the great depression, both world wars, all sorts of financial calamities. They key difference with debt vs. FIRE income is that the payments are not inflation adjusted so the debt gets eaten away by inflation unlike your FIRE income requirements. This alone reduces the risk vs. a typical FIRE plan and then you can add to that in the case of the mortgage you are building up equity that you can access again to bridge any cashflow situations. Taken together it's a totally different proposition than analysing investing for FIRE income to live off of.

You are 100% correct. The thing is 4% SWR is 96% affective. Plus this is over 30 years where one will not run out of money. This means at 30 years having $1 is still a success. For many of us who have well over 30 years to fund, losing significant value over long term is not an option which means we may have to cut spending for a few years during the recession especially if it is a prolonged one. That being said it is much easier to cut spending when you have a smaller footprint by being debt free. I plan on being debt free or very close to it when we FIRE.

you're looking at it backwards.  Having the mortgage actually saves you from some of the risks involved with the 4% SWR.  so having a mortgage would lead to you not having to cut spending at all in some instances.  and for that matter refinancing every 10 years as long as rates are under 7% and pulling the cash out can lead to a 100% success rate historically.  Its tough to think about but its historically what worked.

Boarder,
Have you run the sim of a mortgage with downturn and needing to cut back vs no mortgage and downturn and ability to cutback even further.  By having fixed expenses low a family should easily be able to cut back to a tiny fraction of yearly expenses for a few years during the worst calamities.  Cutting expenses may also need to happen in a personal catastrophic event where an unexpected chunk of cash is required.  Some examples would be needing a lawyer when sued, an unexpected medical issues while traveling out of the country, signifiant damage to a home that isn't insured for that type of damage, etc.

In the significant majority holding unto a low interest rate mortgage should outperform paying down debt.  But for a small percentage of scenarios being debt free is safer especially when one needs to cut expenses. 

I see having no mortgage during FIRE is like purchasing insurance. In the majority of cases the insurance company wins but sometimes you are glad you had that insurance.  And FWIW, I am a strong proponent of holding unto a mortgage while still employed. It is during FIRE when I want my fixed expenses to be as low as possible.

I do not believe the plan is successful when at year 30 I am down to my last $100k.  I consider success that at year 30 I am still able to spend just as much as year 20 which is more likely to happen when holding on to a mortgage because of likely increased growth except for those few times when cutting back is necessary.

[boarder42]

Sorry kills them both the same if your looking at longer time lines you want a mortgage to hedge inflation

[TomTX]

In my mind debt is detrimental to fire and mustachian life as the more debt you have the higher your income needs to be inorder to service the debt.

For example if you have a modest house, car and lifestyle with 0 debt how much money do you really need? If the market tanks and you need to avoid withdrawing as much money you can cut everything to the bone and withdrawal as little as possible.

However say you have a modest house with a $270k mortgage @ 4% here in Colorado, a 15k car loan @ 0% interest and 10k in school loans @ 5%

Instead of paying down the mortgage, car and student loan over the last 5 years you invested the money.

Suddenly we hit 2008 again, stocks are in the tank, you still need to make the payments on the debt and any withdrawals are at a discounted amount so you do not have the option to avoid sequence of withdrawal from eroding your investments.

Except you would actually be ahead with the debt-and-stock in your scenario. The gain in the last 5 years was ~70% (dividends reinvested) and the market only lost 37% for the year in 2008. It was up 26% the following year.

[boarder42]

In my mind debt is detrimental to fire and mustachian life as the more debt you have the higher your income needs to be inorder to service the debt.

For example if you have a modest house, car and lifestyle with 0 debt how much money do you really need? If the market tanks and you need to avoid withdrawing as much money you can cut everything to the bone and withdrawal as little as possible.

However say you have a modest house with a $270k mortgage @ 4% here in Colorado, a 15k car loan @ 0% interest and 10k in school loans @ 5%

Instead of paying down the mortgage, car and student loan over the last 5 years you invested the money.

Suddenly we hit 2008 again, stocks are in the tank, you still need to make the payments on the debt and any withdrawals are at a discounted amount so you do not have the option to avoid sequence of withdrawal from eroding your investments.

Except you would actually be ahead with the debt-and-stock in your scenario. The gain in the last 5 years was ~70% (dividends reinvested) and the market only lost 37% for the year in 2008. It was up 26% the following year.

Yep thanks for proving why a mortgage is a good thing to keep if you're investing.

[TomTX]

In my mind debt is detrimental to fire and mustachian life as the more debt you have the higher your income needs to be inorder to service the debt.

For example if you have a modest house, car and lifestyle with 0 debt how much money do you really need? If the market tanks and you need to avoid withdrawing as much money you can cut everything to the bone and withdrawal as little as possible.

However say you have a modest house with a $270k mortgage @ 4% here in Colorado, a 15k car loan @ 0% interest and 10k in school loans @ 5%

Instead of paying down the mortgage, car and student loan over the last 5 years you invested the money.

Suddenly we hit 2008 again, stocks are in the tank, you still need to make the payments on the debt and any withdrawals are at a discounted amount so you do not have the option to avoid sequence of withdrawal from eroding your investments.

Except you would actually be ahead with the debt-and-stock in your scenario. The gain in the last 5 years was ~70% (dividends reinvested) and the market only lost 37% for the year in 2008. It was up 26% the following year.

Yep thanks for proving why a mortgage is a good thing to keep if you're investing.

It's kind of telling that the "No Mortgage" side comes up with a "What If?" scenario to try and scare folks to their side, and fail to actually do the math and see what would happen in their scenario.

[boarder42]

Bc it's incredibly hard to find a time it mathematically wins and is safer

[the_fixer]

Not trying to use fear just pointing out that while the math may work out it fails to take into account the variability of life it is based purely on the mathematics of the economy and a withdrawal rate not on individual case studies of people and how it worked out for them individually.

With the exception of a few blessed individuals life events or economic events will happen in their lifetimes that introduce variables into the equation that your math can not calculate.

Sent from my Pixel 2 XL using Tapatalk

[boarder42]

Not trying to use fear just pointing out that while the math may work out it fails to take into account the variability of life it is based purely on the mathematics of the economy and a withdrawal rate not on individual case studies of people and how it worked out for them individually.

With the exception of a few blessed individuals life events or economic events will happen in their lifetimes that introduce variables into the equation that your math can not calculate.

Sent from my Pixel 2 XL using Tapatalk

dude seriously quit - you made a post and were proven to be incorrect.  Everything you're touting here is what feels safer but is actually not safer.  And i'll bring up another thread we had a while ago if you're so into your emotional side you cant make the correct math decision in the longest bull market in history, what makes you think you can make the math decision in a bear market and not sell.

[the_fixer]

Not trying to use fear just pointing out that while the math may work out it fails to take into account the variability of life it is based purely on the mathematics of the economy and a withdrawal rate not on individual case studies of people and how it worked out for them individually.

With the exception of a few blessed individuals life events or economic events will happen in their lifetimes that introduce variables into the equation that your math can not calculate.

Sent from my Pixel 2 XL using Tapatalk

dude seriously quit - you made a post and were proven to be incorrect.  Everything you're touting here is what feels safer but is actually not safer.  And i'll bring up another thread we had a while ago if you're so into your emotional side you cant make the correct math decision in the longest bull market in history, what makes you think you can make the math decision in a bear market and not sell.

Can you admit that the math you are using does not account for the events that happen in each individuals life and that it is just based off returns over a period of time and a certain withdrawal rate?

I have been clear in several posts / threads that i understand that mathematically it makes more sense to invest when you have a low interest rate mortgage and that is what I am currently doing.

However where we depart is that I have chosen to pay off my mortgage in full when I FIRE for a multitude of reasons already posted some math based and some emotional.

Sent from my Pixel 2 XL using Tapatalk

[boarder42]

Not trying to use fear just pointing out that while the math may work out it fails to take into account the variability of life it is based purely on the mathematics of the economy and a withdrawal rate not on individual case studies of people and how it worked out for them individually.

With the exception of a few blessed individuals life events or economic events will happen in their lifetimes that introduce variables into the equation that your math can not calculate.

Sent from my Pixel 2 XL using Tapatalk

dude seriously quit - you made a post and were proven to be incorrect.  Everything you're touting here is what feels safer but is actually not safer.  And i'll bring up another thread we had a while ago if you're so into your emotional side you cant make the correct math decision in the longest bull market in history, what makes you think you can make the math decision in a bear market and not sell.

Can you admit that the math you are using does not account for the events that happen in each individuals life and that it is just based off returns over a period of time and a certain withdrawal rate?

I have been clear in several posts / threads that i understand that mathematically it makes more sense to invest when you have a low interest rate mortgage and that is what I am currently doing.

However where we depart is that I have chosen to pay off my mortgage in full when I FIRE for a multitude of reasons already posted some math based and some emotional.

Sent from my Pixel 2 XL using Tapatalk

there are extremely rare circumstances where the math makes sense to pay off a mortgage.  Every "life Event" you've presented skews the math in favor of a mortgage. - the math points to keeping a perpetual mortgage and cash out REFIing throughout FIRE increasing safety.  So if you can admit you don't have a math reason and its an emotional reason sure congrats - you did it!

[Nicholas Carter]

So it sounds like the case for quick-paying your mortgage is dependent on a couple of assumptions:
1. That you are capable of some sort of market timing, where you know that the ROI of anything that we'd think of as an investment is extremely low in the near term, lower than 3%.
-OR-
2. Mortgage rates return to the double digits, and your mortgage is adjustable.

I think a lot of people's fear of a mortgage balance relates to having an adjustable rate mortgage that was over 7%. "Don't take out a mortgage if the interest isn't fixed." short-circuits this concern, which means that the odds of ROI falling under your mortgage rate are extremely low.
But if you were, say, living in the 1980's when a mortgage rate was 18%, I can see how that mortgage would be a bigger priority than a mutual fund with an 11% lifetime return.

[ketchup]

Not trying to use fear just pointing out that while the math may work out it fails to take into account the variability of life it is based purely on the mathematics of the economy and a withdrawal rate not on individual case studies of people and how it worked out for them individually.

With the exception of a few blessed individuals life events or economic events will happen in their lifetimes that introduce variables into the equation that your math can not calculate.

Sent from my Pixel 2 XL using Tapatalk

dude seriously quit - you made a post and were proven to be incorrect.  Everything you're touting here is what feels safer but is actually not safer.  And i'll bring up another thread we had a while ago if you're so into your emotional side you cant make the correct math decision in the longest bull market in history, what makes you think you can make the math decision in a bear market and not sell.

Can you admit that the math you are using does not account for the events that happen in each individuals life and that it is just based off returns over a period of time and a certain withdrawal rate?

I have been clear in several posts / threads that i understand that mathematically it makes more sense to invest when you have a low interest rate mortgage and that is what I am currently doing.

However where we depart is that I have chosen to pay off my mortgage in full when I FIRE for a multitude of reasons already posted some math based and some emotional.

Sent from my Pixel 2 XL using Tapatalk

there are extremely rare circumstances where the math makes sense to pay off a mortgage.  Every "life Event" you've presented skews the math in favor of a mortgage. - the math points to keeping a perpetual mortgage and cash out REFIing throughout FIRE increasing safety.  So if you can admit you don't have a math reason and its an emotional reason sure congrats - you did it!

Thanks for all your posts like this, boarder42.  I once thought this position was madness but when actually accounting for risk and thinking it through as you say, it is absolutely safer to hold fixed-low-interest debt and invest instead of paying it off.

Sure, I'd "prefer" no debt in a vacuum if the only variables were debt-or-no-debt but when you weight in market returns it's a no-brainer for most responsible people.

The "what if" game can be a killer to good strategy.  If something works 98% of the time, you don't replace it with an alternative that works only 80% of the time but happens to cover the  2% of specific scenarios that the 98% option misses to make you feel better.

If you're not responsible with your money and would otherwise piss it away on stupid bullshit, then fine, pay off your mortgage as a forced saving plan.  But that's not most people here.

EDIT: And as others have said, things like student loans or whatnot can pencil out, but that doesn't make the debt itself intrinsically "good." If the interest rate is not fixed and low, it's all bad, regardless of if there was a good reason for getting it in the first place.

[One]

Not sure what's better, depends on the individual, rates, psychology. Sure does feel good to make that final payment tho.

[boarder42]

Not sure what's better, depends on the individual, rates, psychology. Sure does feel good to make that final payment tho.

Feels good when you eat I've cream and typically when you buy something new. Your body releases short term endorphins. That feeling isn't lasting though and this site is about ignoring those feelings and doing what makes the most financial sense

[the_fixer]

I have posted non emotional reasons such as having the ability to adjust my income to qualify for the best level of ACA (or whatever it is in a few years) and to work my Roth ladder but it does not matter.

I truly wish you the best and hope that life cooperates with your plans.

Fortunately we will both be able to FIRE happily and I do not need to convince anyone of my path so cheers

Sent from my Pixel 2 XL using Tapatalk

[boarder42]

I have posted non emotional reasons such as having the ability to adjust my income to qualify for the best level of ACA (or whatever it is in a few years) and to work my Roth ladder but it does not matter.

I truly wish you the best and hope that life cooperates with your plans.

Fortunately we will both be able to FIRE happily and I do not need to convince anyone of my path so cheers

Sent from my Pixel 2 XL using Tapatalk

The tax event you create when selling to pay off the house greatly out weighs the benefits you think are going to be mathematically advantageous. As in your post above you thought something was better but when math was applied it wasnt it's better to do your homework than assume.

[One]

Not sure what's better, depends on the individual, rates, psychology. Sure does feel good to make that final payment tho.

Feels good when you eat I've cream and typically when you buy something new. Your body releases short term endorphins. That feeling isn't lasting though and this site is about ignoring those feelings and doing what makes the most financial sense

No truer words have been spoken, Thanks so much