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Should You Invest or Pay Off Debt?

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Invest VS Pay Off DebtOne of the great things about being a blogger is that I learn something new almost every day. I was doing some research for this post and found that the U.S. total household debt just reached a new peak in the first quarter of 2017. We collectively owe $12.73 trillion and that amount just surpassed the previous peak which was achieved in 2008. That’s over $100,000 debt per household and it is a lot of debt. Most of us have some kind of debt, but it doesn’t mean financial independence is out of reach. We all have to start somewhere. While mulling over where exactly to start, the question many people have is whether to invest or to pay off debt first. This question may seem simple, but it is a bit more complicated that just looking at the numbers.

Here is the debt graph from CMD’s Household Debt and Credit Report (Q1 2017.)

US Household total debt

Is it just a math problem?

At first glance, you might think this is simply a math problem. There are only 2 variables here.

  1. The interest rate you pay on the debt.
  2. The return on investment.

If you owe $10,000 with a 15% interest rate and the historical ROI for the S&P 500 index averages 10%, then it’s probably best to pay off the high interest debt first. However, it isn’t always that clear cut.

Let’s look at our real life example. We don’t have any consumer debt, but we have 3 mortgages on 3 properties totaling about $460,000. The interest rates on each of these mortgages are around 4%. However, we can take a tax deduction on the mortgage interest for our primary residence. The rentals are even better because we get to write off the mortgage interest, depreciation, property tax, and maintenance expense against the rental income. I don’t like paying interest, but it’s really not bad at less than 4%.

We could sell off some assets and get rid of these mortgages, but then we’d lose out on future stock market gains. At this point, I prefer to pay off the mortgages little by little and stay invested in the stock market. Even if the U.S. stock market slows down and returns 1-3% over the next decade, I still believe it is a good long term investment.

Over the short term, nobody knows what future returns will be. The stock market might return 10% over the next few years or it could return -10%. Paying off the debt is much easier to figure out. If I pay off our mortgage early, I’m guaranteed a 4% return. Now this question turns more personal. You need to look at where you are in life and how much risk you’re willing to take. I’m 43 and I plan to invest in the stock market for many more years. We have 40+ years on our investment horizon and the stock market return should be close to the 10% average with that kind of time frame.  For me, it makes more sense to invest in the stock market rather than paying off my mortgages early.

So the answer is different for everyone. However, there are still some basic guidelines we need to follow if you’re putting investing ahead of paying off debt.

Debt needs to be under control

If you want to invest, you need to make sure your debts are under control. Under control means your total debt should decrease every month. This shows that you’re not taking on new debt while you’re paying off the current debt. If your total debt is increasing every month, then it’s not the right time to invest. You need to get those debts under control first.

Here is a common example of debt going out of control – paying the minimum payment on a credit card every month while continuing to use it. First, it will take years to pay off a credit card by sending in the minimum payment. Second, continuing to use the card will increase the total owed every month and likely increase the interest rate along with it. This way of life is not sustainable and it’s no use investing at this point. If your total debt is increasing every month, then you need to figure out how to fix that.

Outsize returns

Some investments are just too good to pass up. The 401k employer matching program is one such example. Mrs. RB40’s employer matches up to 5% of her salary when she contributes to the 401k plan. That’s 100% guaranteed return. You can’t beat that with any normal investment. Even if your 401k has terrible investment options to choose from, you should still contribute enough to take full advantage of the employer matching program. You could always put the money in the money market account if there aren’t any better options.

Debt still needs to be under control, though. It’s no use to invest in the 401k if you’re in a debt spiral.

Scenarios

Let’s look at some scenarios.

Early 20s with student loans

Check out the non-housing debt chart below. Unfortunately, student loan debt grew massively over the last 15 years. New grads these days owe a ton of money for their degrees. An average Class of 2016 graduate owes over $37,000 in student loans. It’s tough to start investing when you have so much debt. This makes me glad I graduated in 1996. I think that’s right before college education costs became such a big burden.

Non housing debt

It’s really crucial to start investing at this age. The power of compound interest will multiply your investment over time and the earlier you invest, the better off you’ll be. Even if you owe a lot of money in student loans, you need to make investing a priority.

Fortunately, I didn’t owe any money when I graduated in 1996. I was able to start investing in my 401k without having to worry about debt. This might not be true for my son in the future so I’m figuring out my response now. I’d advise him to just make the minimum payment on his student loans and focus on investing in his 401k plan. Here is my recommendation.

  1. Max out 401k contribution
  2. Max out Roth IRA
  3. Split the rest with loan payment and after tax investment

Of course, he’d need to avoid credit card debt while doing this.

Another reason why I’d prioritize investing over paying off debt at this age is because young people need to learn how to invest. Everyone makes mistakes when they start investing and I’m no exception. I signed up with my bank’s financial advisor and invested in some terrible mutual funds. I put too much money in my employer’s stock and made many other basic mistakes. It sucks to make those mistakes, but I’m glad I made them early when I didn’t have much money. It’d be a lot worse if I made those mistakes in my 30’s or 40’s.

If you’re young, prioritize investing over paying off student loans. Equally important is avoiding new debts especially credit card debts. New debts can really derail your future.   

45 years old with a mortgage, 2 auto loans, and $16,000 credit card debt

Unfortunately, this is the typical U.S. household. The average family owes $16,000 in credit card debt, $180,000 in mortgage, and $29,000 in auto loans. If this is your household, then forget about investing for now. You need to get your debt under control. Here is what I’d do.

  1. Figure out why you have so much debt by tracking your expenses and see where the money is going. You probably will need to cut back so you’ll have some extra cash flow. Do what you have to do to make sure your total debt is decreasing every month.
  2. Pay off the high interest credit card debts first. A typical credit card has 15% interest rate and it’s really difficult to beat that with investments.
  3. Auto loans. The interest rate on auto loans varies widely depending on your credit score. If you’re paying less than 3%, then it’s probably okay to stick with the payment plan. The important thing is to avoid getting a new car once the auto loans are paid off. Use the extra money to invest and build up a new car fund instead. Personally, I would not buy a car that I couldn’t pay for in cash.
  4. Mortgage. I think the mortgage is okay. It’s up to you if you want to pay off the mortgage early or invest. Either one is good once you get here.

This is a tough position to be in, but it seems like many families are stuck here. You just have to take it one step at a time and work hard to get out of that hole.

65 years old with a mortgage and about to retire

At this point, I’d take simplicity over optimization. If I have enough cash, I’d pay off the mortgage because it will make retirement life simpler.

  • I don’t have to withdraw as much from my retirement accounts. This will give me more control and help avoid the higher tax brackets.
  • I don’t have to worry about beating 4%. I’m pretty sure I’d be more conservative when I’m 65 and our returns would drop accordingly.
  • Full retirement usually means no earned income so you can’t really invest much anyway. I’d stay invested, but probably can’t add much new money.

It’s really important to avoid taking on new debt when you’re near retirement. Paying off those debts will become much more difficult when you don’t have regular income.

Don’t make enough money to pay for basic needs

I just finished The Unbanking of America: How the New Middle Class Survives. It’s unfortunate, but many families just don’t make enough money to make ends meet. More and more people are depending on check cashing centers and payday lenders. The cost of living continues to increase while wages stagnate. It’s tough out there.

In this case, I’d focus on figuring out how to make more income by getting a better job. Forget about investing until things are better. Investing works best when you can add to it consistently. It doesn’t work as well if you can only invest $5,000 every few years. A better use for this money would be for an emergency fund and anything that can increase your pay. Getting a more reliable car or moving closer to your job would be a good use of that money.

What’s your take?

So that’s my take on investing vs paying off debt. Investing is a better option for young folks and people who are in control of their finances. Paying off debt is better for retirees and people who are in financial trouble.

What about you? Where are you in life and do you prioritize investing or paying off debt?

*If you need help keeping track of your finances, try using Personal Capital to help manage your investment accounts. Personal Capital can help track your expenses and keep track of all your investments in one site. It’s very helpful and I log on almost everyday. Check them out if you don’t have an account yet.

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{ 71 comments… add one }
  • Mr. Tako August 14, 2017, 12:32 am

    While I do think 10% average stock market returns might be a tad optimistic, in principle I agree. I want my money compounding for the next 40 years.

    This is exactly why we haven’t paid off our mortgage. I have the luxury of being able to pay it off at any time, but we simply don’t. Once we pay off our mortgage, that money isn’t compounding in our favor anymore. If we stay in the stock market instead of paying it off, there’s a very good chance it will compound for the next 40 years.

    We live a pretty “luxurious” life being able to play this long game, but it isn’t because our life is filled with luxury.

    • retirebyforty August 14, 2017, 7:53 am

      10% is a before inflation. I think real return is closer to 7%. I’m sure we won’t get anywhere close to that over the next 10 years. The valuation is just too high at this point. It’s great that you have the option to pay off your mortgage. Not many people can say that.

  • Ernie Zelinski August 14, 2017, 1:26 am

    As for me, I like to pay off any debts as fast as possible, because I hate debt of any kind. When I purchased my half-duplex for $325,000 in 2007, I put down $$163,000 and mortgaged $162,000. I made an Agreement with myself that I would have the mortgage paid off in 5 years. I actually had it paid off in 4 years. When I hear people say that they own their homes, I ask if they have a mortgage. If they say that they do, I say, “Get real. Don’t lie to me and yourself. You don’t really own your home. You own only a part of it.”

    Tonight I am going to make payments of $878.31 on my CIBC Aeroplan Visa and $2,225.11 on my TD Infinite Aeroplan Visa even though the payments on both are not due until August 31. It makes me feel much better to wipe out this temporary debt immediately and not in two weeks or so. Call me crazy but I have close to $1 million in my retirement account (Untouchable) and another $500,000 in my prosperity account (Touchable). Keep in mind that I have worked less than half of my adult life and when I have, I have worked only 4 or 5 hours a day.

    I do admit that Seth Godin puts debt in better perspective than I have ever done:

    “If you borrow money to make money, you’ve done something magical. On the other hand,
    if you go into debt to pay your bills or buy something you want but don’t need, you’ve done something stupid. Stupid and short-sighted and ultimately life-changing for the worse.”
    — Seth Godin

    • retirebyforty August 14, 2017, 10:54 am

      Great job paying your mortgage off so quickly. Someday we’ll take care of our mortgage too. Simplicity is great.
      Yes, we only own a part of our home. Just the living room and kitchen. 🙂

  • Al August 14, 2017, 1:45 am

    Agree with your premise but you forgot to consider taxes in your 20’s and 60’s scenario.

    My data shows real estate returns over 10% in the long run and stocks around 8%. We too only have mortgage debt in an appreciable asset and there is the difference between good and bad debt.

    It just happened that we were looking at our balance sheet and researching the options. We found that there is a more effective way to pay off debt. Specially mortgages but there are risks associated with that we are still looking into.

    We found out that we could replace our ordinary mortgage with a HELOC. This is not a loan and it is not an additional loan in top of a mortgage. It is a replacement to your mortgage.

    Looking at a fixed rate conventional mortgage and HELOC at the same payment, interest, and terms, you will find out that the HELOC pays your loan 5 to 6 years faster.

    This is more efficient since it uses simple interest in lieu of amortized interest in a conventional mortgage. So it is possible to payoff your mortgages in 5 to 7 years although it has added risks. This approach is very popular in Australia.

    Something to consider at any age, We surely are.

    • retirebyforty August 14, 2017, 10:55 am

      I will check out HELOC. I thought there was some kind of percentage cap on HELOC.

  • Pennypincher August 14, 2017, 1:51 am

    Before the big crash of 2008, experts were saying Americans were 1-2 paychecks away from financial disaster. Then the crash came. Looks like they are working themselves right back to that point. Nobody thinks they will lose their job, until it happens to them.

    Your line: I would not buy a car that I couldn’t pay cash for-is right on! That car depreciates the moment it leaves the showroom.

    • retirebyforty August 14, 2017, 10:56 am

      That’s why I hate car loans. Right away, you owe more than the car is worth. Should be a fun topic to write about. 🙂

  • Ember @ An Intentional Lifestyle August 14, 2017, 3:29 am

    When I graduated college, I had $10k in student loans. We then were dumb and added another $20k in car loans. We had only one income, but decided that for us, paying off debt was the best option. It gave us the peace of mind to know that our overall expenses were as low as we could keep them.
    I agree that getting the match at your business is super big. We get 8% match from my husband’s company, and after we paid off our debt, we have made sure to always at least invest that much.
    We are currently at the point of deciding whether we should pay off our house or invest in rentals or something along those lines. We would rather do much more cash down on a rental to avoid high levels of mortgage debt, so we are thinking we would rather do the mortgage payoff.
    This is a great layout of the options!

    • retirebyforty August 14, 2017, 10:57 am

      8% match is awesome. Paying off loan is a great option too. You win either way.
      I’d invest more if I were you. The mortgage is probably the cheapest loan you can get.

  • Mrs. Adventure Rich August 14, 2017, 3:32 am

    We currently do a mix of both, focusing more on the investing aspect (maxing our my 401k and HSA) while also paying a little extra on our mortgage with the goal of paying it off in ~17 years vs. 30.
    The 2 big reasons for paying a little extra on our mortgage is
    a) The peace of mind of having less debt and becoming completely debt free sooner. We paid off our student loans, car loan (from my first car) and some credit card debt early in our marriage and the freedom of that really helped us.
    b) Paying off our mortgage 17 years would put us at paying it off somewhere in our son’s Senior year of high school. While we are not sure how we will handle college (if he goes) costs yet, the idea of freeing up cash flow prior to his graduation is an appealing one for us.

    • Brandon August 14, 2017, 4:28 am

      You could instead take the extra money you are putting down on your mortgage and put it into a 529 plan. You could actually figure out how much money you have wasted by going back to when you started your mortgage and see all the investment returns you missed out by not being in the S&P 500.

      • Nicoleandmaggie August 14, 2017, 8:58 am

        Depending on financial circumstances and the college in question, paying off the mortgage could result in more financial aid than would putting money in a 529.

    • retirebyforty August 14, 2017, 10:59 am

      I like your approach. We used to pay extra on our mortgage too, but I stopped. Focusing more on investment was the right move for us over the last 10 years. That might not be true over the next 10 years though. The stock market valuation is so high now.
      It’d be great to pay off your house when your son is in college. You’d be able to help much more. Keep at it!

  • Mustard Seed Money August 14, 2017, 3:46 am

    We paid off our mortgage and it was by far the best thing that we ever did. Not having the mortgage provided freedom to pursue opportunities at work that I wouldn’t have otherwise pursued. I was able to be more aggressive because I thought the worst thing that could happen was getting fired. Oh well. I would still have a house at the end of the day 🙂 The funny thing was I got promoted multiple times and am doing better now than I ever did before. All because I stopped playing it safe 🙂

    • retirebyforty August 14, 2017, 11:00 am

      Great job! Thanks for sharing. I think paying off debt is a great move too. You have to do whatever is right for you.

  • Brandon August 14, 2017, 4:26 am

    If you pay down your 3.7% mortgage you are guaranteed a 3.7% ROI. You are guaranteed a terrible ROI. If you invest in the stock market, or a business, or real estate you are at least giving yourself a chance to grow your money.

    • retirebyforty August 14, 2017, 11:00 am

      You also give yourself a chance to lose that money especially now. 🙂 I agree with you, though. 3.7% ROI is very low.

  • Chris @ Duke of Dollars August 14, 2017, 4:32 am

    Our philosophy agrees with yours in most regards.

    We prioritize money in the following order:
    1. High interest credit card
    2. Consumer debt > 5-6% interest
    3. Max retirement accounts
    4. Pay off rest of debt / investment accounts

    The last one on the list depends on your situation and your knowledge of investing, like you if I had a mortgage at under 4%, then stocks would be my move.

    Thanks for sharing!

    • retirebyforty August 14, 2017, 11:08 am

      I hate the high interest rate credit card debts too. That’s an easy way to screw up your finance.

  • Turning Point Money August 14, 2017, 4:39 am

    The only debt we carry is our mortgage. We are ok with this, but pay down little bits of extra principal only to shorten the term. Our money is best put to use in riskier assets where the returns will increase our purchasing power over time.

    My take, its hard to predict the future. You have to be constant optimistic to invest in stocks. On the other hand we could pay down the mortgage and know exactly the return we will get. This decision would provide immediate feedback where as stocks may take years or decades to provide feedback. Sounds a lot easier for decision making until you factor in inflation.

    It really depends on your risk tolerance and goals.

  • Mr. Freaky Frugal August 14, 2017, 4:41 am

    For the record I don’t have any debt and I haven’t had any for many years. When I paid off my last debt, our house, I found 2 things happened:

    1) I now had lot more money to invest because I no longer had a mortgage. Kind of obvious.
    2) There was a huuggee psychological impact when I had no debt. I just felt much better, lighter, and more secure. More optimistic even. It surprised me. So I would generally have a bias for paying down debt sooner.

    • Pennypincher August 14, 2017, 6:03 am

      I totally agree! Especially w/#2. You can’t put a price on that peace of mind. It really is a feeling of lightness!
      Peace of mind-priceless.

      • Helen August 14, 2017, 7:36 am

        I agree. I really don’t like debt. It was a huge relief to me when my mortgage was paid off. Peace of mind is priceless, to me.

    • retirebyforty August 14, 2017, 11:09 am

      That’s great! I can’t wait to get there someday. No more new debt for us. 🙂

  • FromUSA August 14, 2017, 4:42 am

    “We collectively owe $12.73 trillion and that amount just surpassed the previous peak which was achieved in 2008. That’s over $100,000 debt per household … ”

    Personally, I don’t have any debt, but there sure are a lot of spendthrifts out there. The first thing that occurs to me is that I should have invested more heavily in the financial stocks after 2010 to take full advantage of those debt addicts. I guess my next opportunity will come soon enough. I can only hope.

  • Apathy Ends August 14, 2017, 4:45 am

    We have our mortgage 2.75% my student loans 4.85% and a car loan .9% right now and have prioritized investing over accelerated debt payoff (last time I figured it out it was a 10-1 ratio)

    I put soft line down at the 5% interest rate mark, where we would start moving investment cash over to debt pay down. So far we haven’t had to make a switch (student loan debt is variable interest rate)

    Will have the Student Loans paid off sometime mid next year, if not sooner and our car has about 18 payments left.

    • retirebyforty August 14, 2017, 11:10 am

      Nice. I like your strategy and it should work well over time. Getting rid of the student loan would be great. Keep at it!

  • Lazy Man and Money August 14, 2017, 4:53 am

    I think this might be looking at in more detail in another article: “You could always put the money in the money market account if there aren’t any better options.”

    My thought is that even if you have the worst investing options, the S&P 500 should return close to the 10% that you suggest (over the long haul). I can’t think of a 401k plan that doesn’t have such an option. I can’t think of an option that would be worse than a money market account.

    I’m a bit different when it comes to car loans, but maybe that’s because we’ve always got the loans under 3% as you say. We currently have a 1% and a 0% loan that’s stretched out over 5 and 6 years. We’re going to drive them into the ground. During this time, we might build up a general cash fund, but we also might invest more in the kids’ 529 plans or use the money for other necessarily home maintenance.

    • retirebyforty August 14, 2017, 11:11 am

      I agree. The S&P 500 index fund would be a safe option for most people. A money market account might be good if the market is crashing. That way, you’ll have some liquidity in your 401k to take advantage of the dip.
      I hate car loans. 🙂

  • The Grounded Engineer August 14, 2017, 5:28 am

    I enjoy reading posts about whether to pay down a mortgage or invest. I’ve gone back and forth and currently, I am on the path of investing more heavily than paying down my mortgage. I do pay extra here and there on my mortgage, but I maxed out my 401(k), HSA, and my wife’s and my own IRAs. Now, I’m shoveling more money into our taxable account and I am excited to compare over 5, 10, 15 years how this performs vs. if I would have paid down my mortgage more aggressively. Thanks for sharing this great write up, Joe!

    • retirebyforty August 14, 2017, 11:12 am

      I’d love to see how they compare in real life. Investing more is better over the last decade because stock has done so well. It will be a different story soon…

  • Ms. Frugal Asian Finance August 14, 2017, 5:48 am

    It’s astonishing to see how much debt one can get into without even noticing it. I’ve thought about investing and paying off debt a great deal. Mr. FAF and I currently don’t have any consumer debt. We have a mortgage at 4%. I have a small retirement account. Mr. FAF will start his once he starts his new job.

    Both of us know nothing about the stock market, so we will need to dig deep into that. We want to pay off the mortgage early, but I’m also worried about losing out on good opportunity. It’s such a dilemma!

    • retirebyforty August 14, 2017, 11:14 am

      I’d start investing as soon as you can. Invest a little into a regular brokerage account and you’ll learn a ton. Most people learn better from doing rather than reading. If I were you, I wouldn’t worry too much about paying off the mortgage early.
      Good luck!

  • Mrs. Picky Pincher August 14, 2017, 5:59 am

    Oh god, that debt figure scares me. I was hoping that, with the proliferation of the idea of FIRE, we’d see some decreases in household debt. The increases show I’m too much of an optimist. 😉

    For us, it makes more sense to pay off debt before investing. Until we’re done with our student loans, it just doesn’t make sense to pump our money elsewhere. However, once we’re done with our loans, we’ll split our efforts toward paying off our mortgage early and investing.

    • retirebyforty August 14, 2017, 11:15 am

      The auto loans and student loans scare me. Those loans are increasing very rapid. Auto loan in particular. I’m sure a ton of people will default when we get a recession.

  • Jeff @ Maximum Cents August 14, 2017, 6:16 am

    I recommend starting an after tax brokerage account after you have contributed to a 401k up to the company match. That way you have an account with stocks you can start learning about and you have access to prior to retirement.

    • retirebyforty August 14, 2017, 11:16 am

      That’s a good idea too. Even just a little money in a brokerage account will teach you a ton about investing. I like maxing out the 401k, though. It’s a great way to investment for most people.

  • Solitary Diner August 14, 2017, 6:17 am

    I’m 40 and have both six figures of investments and six figures of student loan debt from medical school, with a nicely positive net worth. My loan debt is at prime, so numerically it makes more sense to invest, and it had always been my intention to maximize my investments and pay off the debt over 10 years. However – psychologically there’s something very unpleasant about carrying six figures of debt, particularly as we’re looking at adding a mortgage to our debt load, so I’m considering putting more money towards the debt for emotional/psychological reasons.

    • retirebyforty August 14, 2017, 11:17 am

      Good luck! I think paying off debt is a great move too. We’re not robots and we need to do whatever is right for us.

  • Michael August 14, 2017, 6:21 am

    Like everything in personal finance, it does not have to be an either /or. Now, if you have credit card debt at 20+%, you should absolutely pay that off yesterday before investing.

    However, many people on this blog are likely to only have: student loans, car loans, and or mortgages. By and large, these do not have real large interest rates. For instance, I financed the last car I had as my interest rate was 0.9%; it was a 3 year loan that we paid off in 18 months. I could have paid in cash, but the piece of mind from not liquidating that savings was worth its weight in gold; other people would rather liquidate savings to not have the debt. I did pay off my student loans in roughly 5 years as the 6% interest rate was annoying to me.

    Currently the only debt I have is my mortgage, which is 3.5%. Right now we are pretty aggressive, by normal standards, of saving (30%) while making an additional 2 or 3 principal payments per year (depending on annual bonus). Sure we could move more money into the mortgage but then we lose out on the compounding gains from investments. At the same time, we could max investment and just do the basic for the mortgage, but then we would be locked in for the full term, which will also mean more interest.

  • Dave @ Married with Money August 14, 2017, 7:20 am

    Very interesting breakdown, and I like how you don’t have a one-size-fits-all approach. I definitely think it’s important to learn how to invest when you’re younger.

    I’m still torn on my mortgage. I just really hate having debt and know that it’s keeping us in jobs that we’d probably not be in otherwise. That being said, we’re moving forward with a plan to pay our mortgage off in 20 years (max) and invest at the same time. The end result is we should be able to retire in 20 years, if all goes to plan. Since our mortgage is our only debt, we’re in a great spot.

    As we earn more money through side hustles and raises, that timeline should move up. We’ll throw that extra money most likely toward paying down the house. I’d rather have a paid off house when we go to retire (early), and even if we can’t afford to completely retire, having a paid off house would give us a ton more options and flexibility to be pickier about what we do. That alone is worth it for us.

    • retirebyforty August 14, 2017, 11:19 am

      Good luck with the mortgage payment. 20 years is a long time, but keep at it. That’s a good plan.

  • Dave in Sunny FL August 14, 2017, 8:32 am

    If you’re good with your money, don’t prepay mortgage debt on cash-producing assets. It’s about cash flow, not net worth. Your balance statement doesn’t capture real estate’s benefits: reduced principal debt, rising rents, deduction of interest, deduction of expenses, increase of property value, etc. Equity is lazy money. You control property through the deed, and paying extra money to the bank doesn’t give you “more” control of the property. Keep in mind the 7/10 rule: invested money at 7 percent doubles in 10 years, and at 10 percent doubles in 7 years. The benefit a younger investor has over me is more time for more “doubles.” Therefore, getting invested is so much more important than prepaying mortgages. Thanks!

  • Mr. ATM August 14, 2017, 9:20 am

    I look at paying off mortgage as investing in something that will pay me back month after month in the form of positive cash flow. This is the money that goes into my pocket rather than banks’. The best part, I get to live in my payed off home, rent free and it’s an insured investment that provides me with emotional security of owning my own home.

    Even if you are saving only 3-4% on your mortgage payment by paying off the mortgage, a paid-off home provides guaranteed return vs. stock market where there are no guarantees on what you will get.

  • Cory @ Growing Dollars from Cents.com August 14, 2017, 9:26 am

    I believe young people that have debt should understand investing since it’s best to start early.

    They should accumulate as much knowledge as possible about investing for retirement and create a financial plan with takers for the future.

    I usual prioritize paying off debt first but all of the money doesn’t have to go to debt. You could still invest some of your income in low cost index finds with small contributions.

    It doesn’t matter entirely how much you invest at the beginning. Actually investing before 10, 20 years of your life goes by is the important part.

  • Angela @ Tread Lightly, Retire Early August 14, 2017, 10:02 am

    We bought our house at 23 and then refinanced a year later – 3.375% interest rate! – so even if we don’t pay it off early, we will be mortgage free at 54. That said, I’m targeting FI at ~45, so I’m torn about possibly paying it off a bit early. I think this will depend on if we actually retire early at 45 or not. For peace of mind, I think I would rather have it paid off before actually retiring. Amazing how much emotions factor into financial decisions. Well more than they should 🙂

  • kevin@39months.com August 14, 2017, 10:10 am

    I’ve struggled with this myself over the last 10-15 years, as I have built my way towards financial independence (35 months to go!). For the most part, I did the math method, where if my interest rate was lower than the “10% in S&P 500” rate. We’ve worked hard to pay our debts down, and just get to our house.

    Once it was just the house, we kept remortgaging over the years, but shortening our time (going from 30 to 20 to 15 to 10) while also dropping our rate. It worked for us, as my wife really hates debt.

    Eventually we hit the point where we could either pay it off, or keep the money in the market. While I knew what the math “says” we decided to pay off the mortgage and be debt free.

    I can tell you that doing this and becoming debt free is a wonderful feeling! It was when the hope of FIRE really became apparent. In the end, from a psychological perspective, I say pay off the debt!

    • Martin August 14, 2017, 8:14 pm

      Knowing you own the roof over your head is the best feeling in the world.

  • SMM August 14, 2017, 10:25 am

    ” You need to look at where you are in life and how much risk you’re willing to take.”
    This is one the keys! If your younger, concentrate on the stock market because time is on your side. You won’t get time back. I’m working on contributing the max to my 401k and hope to be there soon. I recently increased my wife’s 401k contribution. It’s important to understand your cashflow and see if there is opportunity there.

  • freebird August 14, 2017, 10:51 am

    Well I’ve never carried any debt to pay off so the answer seems easy. But maybe I missed something? I could have taken margin loans against my equity positions up to whatever my broker allows. Is this a good idea?

    Maybe I would have come out ahead, but I don’t like the idea of using leverage even when the odds are in my favor. I would only consider a margin loan if my cash balance were to hit zero, and I’ve never been anywhere near tapped like that.

    People with higher risk tolerance might take the opposite view, but I hope they’d agree it’s not a good idea to take a payday loan to invest into the stock market. I imagine that very rarely ends well.

  • Jon August 14, 2017, 11:30 am

    I think that it makes sense to invest in stocks while paying 3.7% interest on mortgage as it is logical to assume you can make more than the 3.7% this way, but at the same time I do not see the logic to invest in bonds that for sure pay you less than the 3.7% that you pay on your mortgage.

  • Revanche @ A Gai Shan Life August 14, 2017, 12:43 pm

    You skipped my group 🙂

    Mid 30s, only massive mortgage debt. 2 mortgages – one principal residence, one rental. The rental currently pays for itself, the residence most definitely does not. We invest in our retirement funds and separately in a brokerage for dividend income, but I’m likely not as aggressive with our dividend investing as I should be. Our cash reserves are down to nearly nothing right now, so I’m really crossing my fingers that we’ll be ok on the planned moves for the next few months (wish us luck!)

    If the next few months work the way we hope, then we can start looking at more aggressive investing again but of course I’m still feeling cautious about jumping in when the prices seem higher than they should be. Plus I think I might take one of those “no closing costs, drop interest rates” offers on our mortgage in a few months, because any savings is good savings!

    • retirebyforty August 15, 2017, 10:07 am

      That’s almost like our situation. I’d focus on building the cash reserves back up at this point. Don’t worry about paying down the mortgages. Cash is king right now. Good luck!

  • Rob Flori August 14, 2017, 1:22 pm

    How about paying off that regular mortgage and then opening up a HELOC (home equity line of credit) against that property? That way, you can take money out of the HELOC for other investments, so you utilize part of the equity. It’s not dead money. Also, you lower your required payment on that loan since the only required part is interest. You can pay down the principal if you wish, but are not required to.

    Now, I would not invest this money in the stock market. I would put it into investments that steadily yield a greater rate than your HELOC rate to make it worth it.

    We’ve successfully used our HELOC for years. It has provided a lot of flexibility in moving money between investments, and providing a large sum of cash to act quickly. We’ve used it for hard money loans to investors we know, among other things. It’s worked out quite well.

    The biggest thing regarding the HELOC is that you NEED TO BE DISCIPLINED. You cannot spend it on personal items, or things that don’t return greater than the interest rate, or on high risk investments like stock picking. I trust that all who read these blogs are quite disciplined, correct?

    • retirebyforty August 15, 2017, 10:10 am

      I don’t like HELOC for some reason. I need to do a little more research on that.
      We wouldn’t have problem with discipline. The issue is what to invest in. The stock market is too high right now and I don’t know enough about hard money lending. Isn’t that risky if we get a recession? I guess everything has risk.

  • Tim Kim @ Tub of Cash August 14, 2017, 1:30 pm

    Lol, an average of $100K of debt per household. It’s just not sustainable. I keep telling people, I just don’t see a way out of there being some kind of universal basic income down the line. A ton of high-profile AI/tech people are advocating for it as well. I’m not saying I’m for it. I’m neutral because I see the pros and cons to something like that. But all I’m saying is, with figures like this. I don’t see how it isn’t inevitable. Wage growth is sub-par as well, and in 20 years they’re saying 50% of jobs will be automated in the US. Within the next 5 years probably roughly 10-20% will be automated given that driving in some way or form is the biggest employer and autonomous driving is just around the corner.

  • Wade August 14, 2017, 1:41 pm

    We never owed more than $130k. Mortgage paid off for over 10 years. No regrets staying away from debt.

    For most, the mortgage interest deduction is a trap that is only valuable IF you itemize and then only ABOVE the size-able standard deduction. Rental properties and depreciation are another story. If you every want to get out of the rentals, then the clawback nails you. No free lunch.

    I’d go for debt free if I were you.

    • retirebyforty August 15, 2017, 10:12 am

      We’ll get out of the rental business someday, but I’m not looking forward to the taxes. It will be very complicated and we’ll pay a ton. Oh well..

  • John Andre August 14, 2017, 6:47 pm

    There are so many zero percent credit card offers if your credit is good and you have a balance…

  • Martin August 14, 2017, 8:12 pm

    Another great article.

    Sadly as you noted too many people are living paycheck to paycheck as a result of only earning a minimum wage. The great thing about America is that if you apply yourself, you can either 1) work hard and climb the ranks of your organization, or 2) earn a higher education qualification and get a higher paying job.

    I would always go the debt free route other than the house/rent payment. Sadly to many people on the limit end up with a car that is too expensive as well as other luxuries that they cannot afford.

    I am lucky to have had a great paying job, have no debt other than a rental which pays for itself.

    Retirement is sweet!

  • Anil@www.ak37.org August 14, 2017, 11:49 pm

    Good analysis Joe. I did a quick assessment this week for data over past few years (at ak37.org) & investing a clear winner. Even housing market has been solid. But both these are rare events if you look at long term data. So paying the debt should still be a priority since it holds people back from achieving their dreams.

    A much bigger problem is financial education. I know so many people with advanced Math degrees but they are clueless about their investment plans. As an engineer, I believe you have seen a few in your time at work. That’s the core of the problem, but there is really no discussion about it. For my own education, I am trying to learn key concepts through a daily chart (at http://ak37.org/chart-picture-day/), let me know if you have suggestions on adding anything specific.

    • retirebyforty August 15, 2017, 10:14 am

      Is the housing investment leveraged? Most people pay 10-20% down payment.

      • Anil@www.ak37.org August 16, 2017, 4:53 pm

        I have been asked this question by few other people but I don’t understand what they mean by ‘leverage’ in housing investment? My analysis is simplified, with 20% down payment (& not including monthly payments). I added a little longer analysis, for over 20 years based on people’s feedback to make it more realistic over the long term: http://ak37.org/chart-picture-day/chart-day-aug-15-2017/

        • retirebyforty August 17, 2017, 10:12 pm

          In your chart, you have house value. It’s not a fair comparison to stock because you use $100,000 to purchase the stock.
          You only use $20,000 to purchase the house. That’s leverage. The housing gain should be on a $500,000 house since that’s how much you can buy with $100,000 down.

  • saveinvestbecomefree August 15, 2017, 6:17 am

    Over time I’ve become more and more a believer that debt is the enemy of financial independence. My net worth really took off after becoming debt-free (including our mortgage). The drag of even low-interest debt in today’s low interest environment is large. If you have any bonds you’ll get a better safe return paying off your debt including your mortgage. And if you have a lot in stocks, hoping the stock market goes up a lot from here is a risky bet after such a strong bull market. So either way, paying down debt looks really attractive right now.

    Plus, surveys show that people retire earlier when they have no debt. If keeping debt and investing instead truly made people much wealthier, you would think this wouldn’t be the case. Lastly, very few people seem to regret paying off debt, or take out loans to invest once they become debt-free. Paying down debt just seems to make people happier, regardless of what a spreadsheet says.

  • WealthyDoc August 15, 2017, 12:21 pm

    I love being completely debt free. I can’t remember the last time I owed anything to anyone. I find it very freeing. I can do what I want to do without the pressure of producing enough profit/income to cover debt payments. For me it is more emotional than mathematical.

  • GYM August 16, 2017, 3:32 pm

    This would be a good post for people in Canada to see since Vancouverites and Toronto peeps are obsessed with real estate and taking huge debt levels and speculating on real estate always going ‘up, up, up’. My friend recently bought a half duplex and she has almost 6 times her combined annual income in a mortgage. My other friend recently got a $2 million mortgage and he makes quite a bit, but not over $600K annually.

  • FIREin' London August 16, 2017, 11:30 pm

    for me it comes down to personal choice. I would love to be completely debt free, however it is far more tax efficient for me to carry a larger mortgage and invest the remaining using the UK tax breaks. Sadly we can no longer discount mortgage interest off our tax bill, so as soon as the interest rates start to nudge up I may well change my tune, but that looks likely to be a few years away!
    Cheers,

  • Another Second Opinion August 19, 2017, 6:57 am

    I think you laid it out pretty well, there is no right answer as everyone will be in a different situation. I have colleagues with just student loans and mortgages in the debt category, both with interest rates in the 3’s to low 4%.
    Some get very aggressive with trying to pay off the student loans in 3-4 years, then the house in 15 years, but they don’t realize how much they are losing out on when you consider the average returns of the market. Also, missing the opportunity to get the money in early so it can start compounding hurts them also.
    I say, “yeah, pay more than the minimum payment so you can make a bigger dent,” but don’t go too crazy to where you have nothing left to invest.

  • humpty dance September 1, 2017, 6:17 am

    I’ve seen similar stories over the years and I’m surprised at the very strong opinions of the folks who swear by the math vs. the emotional satisfaction. I want to start by saying that in my opinion, either way is winning. Were in our mid 40s and just starting down the path to FI a lot later than a lot of people. We’ll be reaching that point around typical retirement age. So we wont be early, however we’ll have the bases covered and that’s just fine by us. Paying off the note will do a lot to tilt the equation of what we need to be FI. Right now we’re using our extra money to pad the emergency fund. We live in a state that is in a poor financial condition but has very good schools and is where our network of family and friends reside. Moving is not an option right now so we’re upping the amount in the fund as employers and people are moving out faster than moving to the state. Since we live in a modest home and have a smaller note than a lot of folks, were in no rush to pay it off. The fund and mortgage balance will be equal in a few years and maybe we’ll pay it off. It depends on a lot of variables. Is this the most financially savvy move from the math side of the fence? Nope. But my wife and I decided having the ability to deal with some unexpected expenses or pay off the note is the direction were heading. This is over and above 401k, roth and traditional IRA contributions. Love to read all the ideas from the article and comments. Lots of good ideas to adapt as circumstances change

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