… 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 …
AJC,
How do you leverage into stocks? Is that buying with a margin account? Or are there other creative ways to do that as well?
Another fine post.
I agree with you readers assessment of the situation. I think the main difference between what Dave/Susie offer as advice, and the advice you offer is the amount of thinking and planning required. They offer some fairly easy to implement techniques (If you don’t spend money, you still have it!) that your average person wouldn’t find too much of an inconvenience to their life to act on. As for the 6 options at the end of your post, they require a bit of thinking and time. Not everyone wants to make that kind of commitment, or they don’t feel like they are in the correct place in their life to start something so large. I fully intend on getting around to number on your list, I’m in no hurry though.
Q
AJC – Thanks for writing a follow up. I’m a bit surprised to be quoted, but cool.
Again for me it boils down to the target audience. I agree with your philosophy, and practice it, but I talk to people all the time, even young adventurous people, who either don’t have the basics of spending substantially less than they make for everyday (but not necessarily necessary) expenses or who are intimidated by doing anything more than depositing a steady paycheck and saving a little for retirement.
I agree this won’t lead to them being financially well off, but my point is many people need baby steps. I might not be able to convince somebody to reduce their spending by $250 a month in order to purchase rental property or investments because that feels too complicated or scary for them. But as a start, I might be able to get them to reprioritize and considering saving that $250 in unneeded expense and put it towards reducing their mortgage debt… thus reducing long term expenses and increasing wealth. (Albeit, perhaps not the highest leveraged way)
Some people can make the leap into becoming leveraged and diversifying income streams… everybody could do it if they gave it a real effort. But the basics of living well within – or hopefully below – your means, is part of the real key. Our American culture has got a little out of wack as people use different financial vehicles (credit cards, low down mortgages, etc) to try and maintain a way of life beyond their means. I think Suze does a reasonable job trying to bring that issue to light, and I think people need to learn that first, before they can move onto more advanced leverage and wealth appreciation ideas.
@ Jeff – A number of ways: as an example, I currently have a HELOC on one of my homes and I have a margin account, so I am effectively 100% leveraged on the stocks I buy under that scenario (albeit, 50% secured with real-estate). Not a recommendation, though!!
@ Q – Time IS money 🙂
@ Chris – Interestingly, these aren’t mutually-exclusive strategies (except the paying off your entire home loan bit):
You can be saving WHILE planning.
OR
If you want to stay relatively poor: save INSTEAD of planning 😉
AJC – I’m really glad you’re telling this story. You’re right on point. Suze and Dave are both great at becoming debt freee, but unfortunatly there are a lot of their followers that have done exactly what they tell them to do and they’ve become debt free but poor.
The truely wealthy believe in leverage.
Keep up the great work. Consider me subscribed!
@ Tyler – I think you’re right on the mark!
I’m definately an avid dave follower, but I also agree that the opportunity cost of not leveraging is too great. sure I can wait 15 years to pay off my house then wait another 15 to save up to buy my first investment property, and sure it is less risky that way and as they say “slow and steady wins the race”. But, if i can purchase those with 20% down and cashflow the payments while maintaining a buffer for when times get tight, in 30 years i can have multiple paid for properties instead of just 2, all-the-while not incurring that much more risk.
hi AJC,
Today I did a little trading of a stock I thought was over sold, so I bought enough shares to bring my cash value close to zero, but I didn’t tap my margin account at all, nor have I ever in the past.
How can over come this fear of leverage? I can sleep fine at night with the possibility of lossing all my own money, but knowing I could loss more than I have is pretty scary.
@ Jeremy – I agree with everything except the ‘slow and steady wins the race” bit: if that means following Suze and Dave’s advice then it just means the ‘slow road to the poorhouse’ … but, at least you have a house! 😛
@ Josh – If by ‘trading’ you mean “buying for the long term” then there’s no need to leverage. I prefer to leverage into RE and businesses, anyway.
On the other hand, if you’re into short-term trading, then why not margin-borrow to increase your risk/reward? By speculating, you are aiming for spectacular business-like profits … don’t hamstring yourself by just restricting yourself to using all your own cash … again, I’m not actually recommending this as a strategy 🙂
With the tax benefits and low rates attached to mortgages it is downright silly to pay down your mortgage (especially if it is at 6% or below) when you could invest and receive an even higher return without too much effort.
@ Total – seems pretty ‘clear cut’ to me too!
For the average income earner………………………………..
If you pay off all your debts as early as possible dosen’t that give you more $$$$$ to save over the the rest of your life. If you have no mortgage, no debt and an a steady income, that’s more money to invest wisely. If your up to your eyeball’s in debt it’s not easy to devote the time, money, and energy needed to buy, sell, and invest in businesses and real estate. Not that it’s impossible, just unlikly to be sucessfull. Don’t get into debt, live within your means and pay off your mortgage asap, your home is an asset that can be financed anytime. Use the money when a terrific opportunity presents itself.
@ Michelle- at least, that’s the conventional thinking. The problem is, how many people following ‘conventional thinking’ are rich? Should be all of them, right?
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Brilliant, just found you! You and I are essentially clones when it comes wealth creating. Keep it up. Hopefully you will pick some of the herd off and help them to a more comfortably financial life!
@ David – Thanks. I think that you will also be intrigued by my ‘experiment’ to help 7 Millionaires … In Training! to reach their own financial goals at my ‘sister’ site ( http://7m7y.com ). Feel free to stop by and comment …
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WHY is she on CNBC. CNBC is all about risk and the pure joy of capitalism, and she is against all of that, what is she doing there? She even is right after Kudlow, and he is about as opposite as you can get from her.
Jason Dragon
http://blog.capitalactive.com/
@ Jason – apparently, she keeps all of her money in cash!
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