… with a fly ball that even Dave Ramsey won’t be able to catch!
As expected, my recent post “Contrary to popular opinion, paying off your mortgage is the dumbest move you can make …” drew a number of comments – but, not as many deep criticisms as I was expecting (hoping for) … I would’ve liked some issues out in the open so that we can really bang them around.
After all, my view is diametrically opposite to the ‘pay off ALL debt INCLUDING your mortgage’ view espoused by the likes of Suze Orman and Dave Ramsey!
With some suitable flaming of the “you’re just another Make Millions In Real Estate Like I [wished] I Did guru” or “Robert Kiyosaki knows what he’s talking about compared to YOU” kind, I’d at least be able to dig in and show you why my view is correct for MOST people.
I’d also be able to explain why, perhaps counter-intuitively, it’s actually the more conservative option.
Instead, let me make do with the much more polite, and more thoughtful, comments that one reader – Chris – did leave on that post:
AJC – I completely understand and agree with your concept. I think the reason why you and Suze Orman differ is because you target a different group, or have a different approach.
You talk much more about leverage. Suze Orman wants to get people to stop buying frivolous things and instead pay down debt (because most people are buying junk and creating more of it).
While anybody can start a business, a rental, etc. There are people who don’t have the ambition or the stomach for it. The concept of leverage and more involved ways of wealth appreciation get lost on those people.
The point that needs to be made is, if you aren’t going to leverage that debt properly to grow wealth, then paying it off is better than buying useless things. Perhaps for some people we need to focus on getting them to be frugal spenders first, and then wealth builders later.
I would also note that I think paying off mortgage debt should rank much lower than other investments in reducing higher cost debt, a business (including rentals) or retirement accounts. But for some people, putting an extra $100 towards a mortgage is a great way for them to start being more financial considerate.
The assumption is that my approach is different to Suze’s and Dave’s because:
1. I aim at a different audience
2. Their approach is a more sure way to a comfortable retirement
3. They focus on ‘frugal living / debt free’ which comes before wealth building
It seems logical, safe, and conventional … and, I agree on one point, my approach isn’t for everybody …
… it’s just for anybody who doesn’t want to retire on the poverty line!
By that, I mean that I am targeting anybody who wants to retire with a nest-egg of MORE than $1 Million in LESS than 20 years.
Now, that is almost everybody that I have ever known or met– and, I’ve known and worked with a LOT of people from call-center people to CEO’s – because $1 Mill. in 20 years (the typical target for the ‘save your way to wealth’ crowd) simply gives you the equivalent of $15k per year in today’s spending-dollars!
For every extra million dollars, you only get an additional $15k per year to live off … and, for every 10 years that you will retire sooner, you get another $7,500 per year ‘pay rise’.
So: how much do you need to live off now? How much do you need to live off when you ‘retire’ and by when?
I don’t know the answers to these questions, so you do the math …
I can tell you this: if all you do is live frugally and become debt free you will be poor, with a roof over your head … if you don’t, you will be poor without a roof over your head.
Neither seems like a great option … so, you can understand when I say that the Suze Orman / Dave Ramsey ‘save and pay off all debt’ approach still seems a tad ‘risky’ to me, and a sure approach to a fairly uncomfortable retirement.
Given that Door 1 and Door 2 pretty much suck [AJC: OK so one door sucks more than the other … are we here to measure degrees of ‘suckiness” or what?!] what’s left is Door 3 …
If you live on the same planet that I come from (Planet Save a Little, Spend a Little … Enjoy a Lot), then we simply have to aim for more … a lot more!
That’s where leverage comes in … and, it has to come in WHEN saving, WHEN learning to be frugal, WHEN paying off all debt (and, probably BEFORE paying off some debt) …
… and, if you are aiming to retire somewhere above the poverty-line, then you are simply going to have to find the ‘ambition or the stomach’ for something.
I never had the ambition or stomach for work … I simply had to do it or starve. Don’t you?
I never had the ambition or stomach for investing … I simply had to do it or figure on retiring near-broke. Won’t you?
If the government takes away your social security safety net … if your employer takes away your pension … if your rich relatives die and forget to leave you anything … it’s going to be that simple: do it or retire broke.
OK, if that hasn’t turned you on, then nothing I ever write will … otherwise, here are some options, in decreasing order of risk and difficulty – but, also decreasing order of financial outcome:
1. Start a business
2. Buy a business
3. Invest in real-estate
4. Buy your own home
5. Leverage into Stocks
6. Leverage into Index Funds
In every one of these cases, you borrow as much as the banks, convention, your gut, your advisers tell you to … then you hold – preferably for ever.
[AJC: Speculative ‘investment’s such as: rehabbing/flipping real-estate; trading stocks/options etc. all belong in Category 1. Start a business]
Now, go do it …