Author Topic: The psychological impact of paying off low interest debt  (Read 1365 times)

ETBen

  • Bristles
  • ***
  • Posts: 405
    • I started a journal about single parenting and the new life towards FIRE
The psychological impact of paying off low interest debt
« on: December 29, 2017, 12:43:11 PM »
Iím curious about this and wondered if someone had a good explanation. I can see how things like Dave Ramsayís debt snowball has a positive psychological impact. Paying the lower amount and gaining momentum. Even though paying the higher interest rate first is better from a mathematical perspective.

But what about paying off debts like mortgages and cars that have lower interest rates than you would earn from investing that same money. Besides being opposed to having debt or seeking the feeling of freedom, is there a good argument to do that, rather than invest the money?  Is there a benefit or perspective that I donít see?

FIRE 20/20

  • Bristles
  • ***
  • Posts: 306
Re: The psychological impact of paying off low interest debt
« Reply #1 on: December 29, 2017, 01:35:46 PM »
There are a number of benefits to paying off a mortgage early that aren't captured in the never ending discussions on this topic that I see on this forum (friendly reminder to search - this is one of the most common topics on this forum).  One is that by paying off your mortgage prior to FIRE or downshifting is that you will reduce the amount of income you need to support your lifestyle.  In doing so you probably will qualify for larger ACA subsidies.  If you're a FatFIRE person then you may drop yourself from a tax bracket that requires you to pay capital gains taxes to one that doesn't.  Finally a mortgage is generally a relatively fixed cost.  By not having a mortgage you have a lot more flexibility to cut spending if things turn out bad during the critical first 5-10 years of retirement.  Flexibility is the key, particularly if you're planning to retire with a greater than 4% withdrawal rate.  There are also the benefits that are usually discussed when this topic comes up, including the difference between a guaranteed lower return (paying off mortgage) vs. a likely higher return with some potential for losses. 

This isn't to say that I recommend paying off a mortgage early; in general I think it's probably a good idea to keep it and invest.  But it is more complex than simply looking at expected market returns vs. mortgage rate and deciding that anyone who decides to pay their mortgage off early is simply doing so due to a purely psychological benefit.

ETBen

  • Bristles
  • ***
  • Posts: 405
    • I started a journal about single parenting and the new life towards FIRE
Re: The psychological impact of paying off low interest debt
« Reply #2 on: December 29, 2017, 02:05:19 PM »
Thanks, good info!  I actually tried to search but it never works for me. Iím not sure if thereís some trick to it.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4844
  • Age: 34
  • Location: Seattle, WA
Re: The psychological impact of paying off low interest debt
« Reply #3 on: December 29, 2017, 04:10:35 PM »
The trick to forum searching is to use Google. Just put "site:forum.mrmoneymustache.com" in the query.

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5506
  • Location: Fayetteville, NC
Re: The psychological impact of paying off low interest debt
« Reply #4 on: December 29, 2017, 05:04:23 PM »
The issue of cash flow also needs to be considered.

Some folks, especially when they first start their getting their financial ducks in a row, have expenses that are too high for their income.   They have very little wiggle room in their monthly budgets.  Anything that goes wrong is a real problem.

In that situation, longer term savings are less important than short term relief from budget stress.

Once the budget has a comfortable surplus by paying off some quick wins and freeing up cash flow, it can make more sense to switch away from the smallest debt first approach.

The other issue to consider in these circumstances is whether the debt is secured or not; and whether the debt is easily dischargeable in bankruptcy, should that unhappy event be necessary.


ETBen

  • Bristles
  • ***
  • Posts: 405
    • I started a journal about single parenting and the new life towards FIRE
Re: The psychological impact of paying off low interest debt
« Reply #5 on: December 29, 2017, 10:28:11 PM »
The trick to forum searching is to use Google. Just put "site:forum.mrmoneymustache.com" in the query.

Thanks!