You’ve heard about the so-called Debt Free Revolution?
Suze Orman and Dave Ramsey are the most famous proponents of the pay-down-all-debt approach to personal finance.
But, just because something is called a ‘revolution’ doesn’t necessarily make it right!
… I’m sure that plenty of good French aristocrats also lost their heads during the French Revolution!
But, Money Monk was just voicing the view that’s it’s OK for debt-averse people, or those who know nothing about investing, to pay off their mortgages early when he said:
To each their own. In my parents case it was wise for them to pay off their mortgage because they have no knowledge of stocks and investments.
In my case it maybe be wise not to pay off my mortgage. Some people just like the simple no risk life. Younger people tend to take more risk because time is on their side.
Unless more people are educated about the market, many will go the debt free route because it take no risk
Firstly, if your parents were born in the US, MoneyMonk, they didn’t want a mortgage because they (or their parents) saw how the banks pulled mortgages to try and fund the run against their cash deposits during the Great Depression.
Their view was simple: “if I don’t have a mortgage, then the Bank can’t take my house away”.
But, this can’t happen any more. The bank can’t take your house away if you continue to make payments on time …
Secondly, having no knowledge of “stocks and investments” is no excuse: you can get that knowledge … even if it was a valid ‘excuse’ for your parents, it certainly isn’t the case today. Blogs such as your and mine are just one example about the sources of information out there today …
But, I agree: if time is running out, and you have less than 10 years left to retirement, then it’s probably too late – and too risky – to change course. The volatility of just about any investment over a time frame of a decade or less makes them simply too risky to bet your financial future on.
But, if you do have time on your side, then the risk is totally on the side of NOT investing. Because not investing guarantees a poor financial outcome!
And, if any of my readers think that getting a 6.5% – 8.5% after-tax return is ‘investing’ then they should be reading Pensioners’ Weakly instead of this blog 🙂
“But, this can’t happen any more. The bank can’t take your house away if you continue to make payments on time … ”
That is untrue. The bank is under no obligation to renew your mortgage come renewal time. My father had a house taken from him this way.
@ Traciatim – That’s why you lock in a 30 year mortgage … nowaday’s YOU get to lock the bank up!
Well we don’t know what country Traciatim is in. Maybe they don’t have long term mortgages. Here in Australia there are long term mortgages but the rates are variable. Some people now are losing their houses because they ould pay when the rate was 6% but not at 9.5% currently. I’m sure even more of that happened here in the late 1980s.
It’s easy to learn about investments if you have the motivation but it is hard to get savvy. It’s easy to say – oh they should buy an index fund – but will they stick with it really and not sell off at the bottom of the market? Some people are better off paying off their mortgage than getting into bad market timing or dodgy investments. Getting rich isn’t for everyone. Not everyone can get rich obviously anyway…
@ Moom – True … but, we’re not here for ‘some people’: this blog wasn’t titled “How to save your way to $1 Million in 20 Years” for a reason 😉
Debt used for investment purposes is a good way to increase the return on your money and not paying down a mortgage is a good way to free up funds for investments that will achieve higher returns than the imputed retunr achived by paying off debt. Given the interest rates I have have to pay in Hong Kong at the moment this is a pretty painless decision: http://aprivateportfolio.blogspot.com/2008/08/interest-rates-creeping-up.html
Of course, it has to be recognised that there is no such thing as a free lunch and the use of debt carries with it the potential for increased risk as well as increased returns. A lot of people have been experiencing the downside of debt as property and equity markets have fallen this year. The ability to make payments (i.e. cashflow) even when the markets are moving against you is a vital tool in managing the risks inherent in using debt.
As a last point, there are circumstances in which paying off debt is the right move. If I was planning on spending a year or two sailing around the south pacific, I’d probably want to keep my investments but get rid of the debt for that time. People who which to spend their time on things other than managing their investments may be better off without debt (or, at least, with very low levels of debt). In adopting the lower risks of a low or no debt strategy, it has to be accepted that this will likely lead to lower returns over the longer term.
A Trainee – Thanks; I gues HK interest rates are much higher than the lows w are currently seeing in the US?
BTW: I’d rather get rich THEN sail around the world 🙂
can you go into a little more detail on “And, if any of my readers think that getting a 6.5% – 8.5% after-tax return is ‘investing’ then they should be reading Pensioners’ Weakly”
@ Randy – Welcome! Read this post: http://7million7years.com/2008/02/21/do-you-really-care-that-weekly-contributions-of-34-could-potentially-grow-to-over-76000-in-20-years/