Pay off debt or invest?

I’m publishing a whole series of posts targeting Debt … it has very little to do with conventional financial wisdom on this critical subject. Here is the second post (I have another one coming up, soon) …


Gen-X Finance is polling his readers as to whether they would prefer to pay down debt or save:

If you have both debt and a need to save money, how do you prioritize? Some people will pay off debt at all costs before saving a penny. Others will be fine getting by with minimum payments while dumping as much money into savings or investments as possible. While others try to do a little bit of both. That’s why the poll today asks how you view this subject.

You should go ahead and answer the poll.

Now, this is such an important decision – perhaps one of the MOST important mindset changes that you need to make if you want to follow in my $7 million in 7years footsteps – that, for my new readers, I will point you again to my trademark Cash Cascade™ system (don’t worry, it’s simple and free) that replaces the Debt Snowball, the Debt Avalanche and most of the other other debt repayment systems that you may have previously tried.

Here’s why it works:

People make the mistake of thinking that there is GOOD DEBT (typically, investment debt) and BAD DEBT (typically, consumer debt) … but, this is only true BEFORE YOU TAKE ON THE DEBT.

Once you are in debt, then there is only CHEAP DEBT and EXPENSIVE DEBT. Put simply, pay down your expensive debt, until only the single digit ones (on an after tax basis) are left, THEN start investing.

This goes against the ‘pay down all debt’ theories, but works both logically and practically. Try it … and, let me know how it’s working for you?

Becoming debt-free is a tactic …

My uncle had a wish: he wanted to stay healthy. He heard that eating apples is good for you (you know, ‘an apple a day keeps the doctor away …’), so he started eating apples.

If one apple is good, he thought, then two must be better. In fact, he started eating apples religiously. He got Vitamin A poisoning. He stopped eating apples.

There is such a thing as ‘too much of a good thing’ 😉

I sent out the tweet in the graphic at the top of this page because too many Twitterers/Bloggers – and their followers – eat too many apples.

Here’s what I mean …

If you’re healthy you get to run and run and run, just like a puppy does. Fun!

If you’re financially-free you get to do pretty much whatever your ‘freedom’ allows, and you no longer need to spend 8 hours a day (or more) at work for The Man. Whoohee!

But, being healthy and being financially-free are ‘wishes’ – something that you want. Just wanting something doesn’t mean that you’ll get it.

So, you eat an apple a day because a doctor told you it’s good for you … or you start paying off debt because a blogger told you that’s it’s good for your financial well-being.

But, the problem with these proscriptions is that there’s no prescription [AJC: yet another bad pun] … you need to be told exactly how much of a good thing is really a good thing, before you keep going and overdose!

You see, eating apples – as my uncle found – and paying down debt – as many blog-readers find out too late – can be good or bad for you, depending on how much you under- or over-do things. Eating apples and paying down debt are just tactics promising to help you get you to where you want to go.

With debt-reduction – as with apples – there’s an optimal point: it’s the point where it contributes most to your real goal.

If your wish is to become financially-free then your goal should be able to be expressed as a specific Number and a specific Date; you should apply debt reduction in such a way that it maximizes your chances of reaching that Number by that Date.

I have a hypothesis that the Number/Date bell-curve for my reader population – nay, the entire personal finance blogosphere’s readership – is well and truly centered where paying down debt only makes:

– absolute sense in the double-digits i.e. where most credit card, personal, and (many) auto loans sit today

– no sense (nonsense?) in the low-to-mid single digits i.e. roughly where home mortgage rates and student loans sit today

And, the remaining debts (say, between 5% and 10%), they can be paid off, if you have low financial aspirations but if you are aiming for $7 million in 7 years, I’m suggesting that these, too, need to be set aside for a while in favor of funding your latest startup and/or active investment.

Paying down debt IS investing …

Budgets Are Sexy [AJC: If J. Money really thinks so, I don’t want to be invited to his Stag Night!] poses an important question: “Should you invest or pay down debt?”

And, he provides these guidelines to help you decide the answer:

Whenever you have any extra money in your pocket, make sure to take care of these financial priorities, in this order, before you do anything else:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Accumulate a financial safety net. If you don’t have at least three to six month’s worth of your living expenses saved up in an accessible emergency fund, that’s the next place your extra money should go.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with double-digit interest rates, attack those financial burdens next.

If you’ve accomplished the above and still have excess money left over each month, you’re in a great position. Maybe you have an extra $100 and are struggling with whether to invest it in your Roth IRA or to use it to pay down your mortgage, for example. The answer to the dilemma is simple: Determine which option is more profitable for you. To do that, you have to figure out your after-tax return for each choice.

I agree with the first bullet point: you must pay down any delinquent debts. You have to keep your head above financial water.

As to the rest, well, I think that we’re in danger of forgetting a critical point:

Paying down debt is investing!

You’re investing in your own ‘debt instruments’, where the risk is low (in fact, by paying down the debt, you’re IMPROVING your risk profile) and the return can be low / mediocre / high depending upon the AFTER TAX cost of the interest and any other fees and charges.

Your student loans and mortgage debts are probably LOW interest, hence LOW return investments.

Your car loan and credit card debts probably HIGH interest, hence HIGH return investments.

… and, you may have some personal loans or other debts that fall somewhere between the two.

So, I would modify BAS’s guidelines as follows:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Put in place a financial safety net. Put a HELOC in place; make sure that you can tap into your retirement accounts, or keep some spare loan facilities in place in case a financial emergency arises.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with high double-digit interest rates, you’re probably safe in attacking those financial burdens next.
  4. Find investments that can outperform your remaining debts. If you have 1st mortgages, student loans or other loans with low single-digit interest rates, let them ride PROVIDED that you instead invest somewhere where AFTER TAX returns should be expected to outperform these remaining loans by a comfortable margin.

Once you’ve made the mental leap that paying down debt IS investing, you’re in a MUCH BETTER position to decide how best to use your money … particularly if you have optimistic financial goals 🙂

The problem with Henry …

Actually, it’s not the problem with Henry, it’s the problem with HENRY: High Earner Not Rich Yet.

Included in this group, a group that most workers mistakenly aspire to, are those doctors and ceo’s (at least those not in the Fortune 500) that I mentioned in yesterday’s post.

Now, this is only interesting because I can now answer the question posed on Twitter [AJC: you can glance across to the right to conveniently find a link to my Twitter account].

Dianne Kennedy (CPA), I think erroneously, links HENRY’s to taxes then lifestyle, but (as my article some time back about doctors also said), I think it boils down to three non-tax (even though taxes hurt!) issues:

1. As your income grows so does your spending … then some!

2. Keeping up with YOUR Jones (i.e. other high-flying corporate executives and professionals) is VERY expensive

3. You can’t sell a salary package (like I can sell a business, some shares, or a property or two) when you decide to retire

[AJC: You need both a big 401(k) – see reasons 1. and 2. why this doesn’t happen – and a huge golden parachute, which may / may not happen to compensate for reason 3.]

If HENRY’s want to become rich, they have only two choices:

– Get lucky, or

– Invest a very large % of their annual earnings

Let’s assume that a HENRY – conveniently named Henry who happens to be ceo of a medium-sized business – is earning $290,000 and has already managed to save $1 million – our consummate Frugal Investor – and has arranged things so that he can continue to save a very hefty 35% of his salary (this is all pre-tax).

After 22 years, Henry will have saved just enough (in Rule of 20 terms) to replace his $290,000 ceo’s salary … by then, inflation adjusted to $661k per year, assuming that he wants to maintain his lifestyle [AJC: more importantly, assuming that he can – and wants to – ‘ceo’ for 22 more years … if he ‘only’ starts with $500k in savings, he’ll need to work for at least 26 more years].

Seems easy, but human nature [read: urge to spend it up] is what it is …

I should know: I was ceo of my own business, employing over a hundred people across 3 countries (USA, Australia, and New Zealand).

I paid myself $250k per year, and had cars, cell phones, laptops, and health insurance all paid for by my company – I reinvested all the remaining profits in these businesses.

I had a $1.65 million house in the ‘burbs, paid for by cash (s0, no mortage), and two children in school (one private, one public). We traveled domestically and/or internationally once or twice a year as a family, ate at ‘normal’ restaurants (and, the occasional top-tier eatery).

I can’t see how I could have saved 1/3 of my salary … I couldn’t even save 10% 🙁

Of course, I could have saved 10% if I really tried, but my point is that it’s very hard to save 30% of even a high salary, unless you gear yourself up to do it from the very beginning.

[AJC: Look, it’s not my job to tell what should happen as you get richer, but the reality of what will happen and how to do better … when you get to $250k you will bring with you exactly the same spending and saving habits as you have today, if not worse. Moral: start MM101 today!]

In other words, don’t divert all of your creative energy into playing Corporate Lotto (i.e. chasing a higher salary) if you want to get rich – or, even to reach a more humble goal, such as becoming debt free (a dumb goal, IMHO).

First – and, as soon as possible – learn how to get rich (or debt free, or …) by taking action right now, with whatever you can bring to the table.

If your salary happens to improve along the way, all the better … but, don’t rely on it!

When is cheap debt expensive?

Dave Ramsey says to use Gazelle Intensity to pay down all debt, before even thinking about investing. Yet, would he consider running his (rather large) business without an overdraft, or leased cars, equipment, and/or furniture?

I doubt it … he needs to preserve his capital, and put it to better use by growing his business investment (more stock; better marketing; more staff; more training; etc.; etc.)

So, why should personal finance be any different?!

But, Dave Ramsey would argue to pay off all debt, whether it is ‘good’ (e.g. produces income) or ‘bad’ (e.g. credit card loans for consumer goods, like that LCD TV that you just bought).

If you are a regular reader of this blog, by now you will know that my view differs markedly; I say:

Once the debt is incurred, it is no longer ‘good’ or ‘bad’ … it becomes either ‘cheap’ or ‘expensive’.

And, as I mentioned in a previous post

You should only pay off your ‘expensive’ debt!

What makes a debt ‘cheap’ or ‘expensive’? What is the yardstick interest rate? 2%? 5%? 11%? 19%?

Any, all, or none of the above. You see, it’s relative:

– Debt only becomes ‘cheap’ when you have something that produces a better after-tax return [AJC: probably, a MUCH better return to account for the fact that paying off the debt is a GUARANTEED return].

– Otherwise, by default, all debt becomes ‘expensive’ and you should do as Dave Ramsey suggests.

Fortunately, finding suitable investments to offset the need to pay off relatively low-cost debts such as student loans and home mortgages is as easy as finding some great value stocks, a cashflow positive real-estate investment or three, or a small business to buy or begin …

… provided that these are things that you are:

1. Passionate about,

2. Educated in, and

3. Convinced are needed in order to achieve your Required Annual Compound Growth Rate to reach your Number.

I recommend that – if you are pursuing a Large Number / Soon Date – you must pursue your investments with Cheetah Focus … a great example is provided by Eric [AJC: emphasis added]:

I graduated college 2008 from the University of Texas. worked at an oil and gas company in Houston named Flour Daniels. they had massive lay offs in 2009. I worked for a year and managed to save well over 50% of my pay. I reinvested it all into the stock market. I set up a regular investment account and a Roth IRA.

To date my Reg. Stock account is up 30%+ and my Roth IRA is up over 60%. and I still have another month to increase my yearly gains for it

I have had no prior experience with investing/trading. I played safer stocks/ETFs .. Bought on dips and sold when it would pop.

Oh and I also took out a loan from Citi bank.. who sent me a 10,000 loan offer in the mail with a 2% interest for the life of the loan. LOL.. I had to take it. I threw that into stocks also.

Any how my point is. If i had focused on paying off my $28,000 college debt I would have missed all of last year gains. I just made it a goal to beat my debt interest. and I did!

Currently I have enough money to pay off all my debt. but of course i’m not going to do it. I took out 2K from my portfolio to invest in an online woman’s clothing site. We have great style at affordable prices. we are not making huge profits.. but we are selling and that is encouraging.

Did you notice in the image (above) why the gazelle has such intensity?

It’s because the cheetah is coming up fast and furious on his tail 😉

Is he really a clever dude?

[Disclaimer: Artist’s rendering of AJC … any resemblance to other bloggers living or dead is purely coincidental]

Have you noticed that I don’t have a category for debt on this blog?

[AJC: you can click on any of the keyword/categories in the orange header-banner above to see a list of blog posts focusing on that subject]

It’s not because we don’t talk about debt, as we clearly do

…. it’s because, to me, creating or paying off debt is just the same as investing (after adjusting for tax: a dollar saved in interest, is the same as a dollar earned in interest or investment income, right?).

That’s why I was genuinely interested in finding out what was going through fellow-blogger Clever Dude’s mind when he loudly proclaimed:

We’re Free of Consumer Debt!!!!!!

As of today, we have paid off all $113,000 of our student loans, auto loans and credit card debt.

We are debt free!!!

My fellow blogger is right to be proud of his achievement … but, does that make it the right investment choice?

Check it out:

He paid off $113k … now, this is no small achievement, some people don’t even save that in their entire lifetime! Still I couldn’t resist asking Clever Dude for some details:

The rate on the student loans was 6.25%. The 2nd mortgage is 7.875%. First was 5.25%.

I chose to pay off the student loan because it was more manageable and I could get it off the books faster than the 2nd mortgage. Mathematically, the 2nd mortgage makes more sense until you factor in the tax deduction which brings them down to about equal.

I also wanted to know a little about his current net worth (after the mammoth debt-payoff feat) – nosey, aren’t I?! Anyhow, Clever Dude was happy to share:

Don’t mind the math as I rounded:

Cash: 17%
Investments: 37%
Home Equity: 6%
Autos: 17%
Personal Property: 12% (if I could sell it all right now)
Whole Life Insurance: 5% (yep, I got it, it’s expensive, but I’m not giving it up!)

So, Clever Dude has ‘invested’:

-> $113k in loans returning (by avoiding having to pay) around 6.25% after tax

-> 17% of his net worth in cash returning (I’m guessing here) 2%?

-> 6% of his net worth in his home returning some unknowable amount in future (potential) capital gains

-> 5% of his net worth in insurance ‘investments’ of dubious value after (often) exorbitant fees

-> 29% in (presumably) depreciating ‘assets’ such as autos and personal property

Now that he is debt-free, what  will drive Clever Dude’s investment strategy from here on in? He says:

Investing and savings are next up in our planning. Honestly, we’ve spent so much time just thinking about debt, we haven’t spent much time on the future. Now is the time.

Now, I’m not here to pick holes in Clever Dude’s investment strategy as he had a strategy and moved mountains to achieve it – not to mention, that we know so little about Cleve Dude’s true financial situation that we are in no position to advise / criticize …

…. but, I do want to use this example to show why following a blind – and, in my mind totally arbitrary – investment goal such as “reducing debt” is not always the best idea:

Clever Dude has only 37% of his net worth in investments right now (OK, he is working on his Master’s Degree, so he has had other things on his mind) and has limited the bulk of his net worth’s returns to only 2% to 6% (or so) by almost-totally focusing on paying debt.


So, that he can start “investing and saving”!

Now, does that make sense to you?

Even more on the debt-free fallacy …

I’m not a Ramsey fan, and I am equally not a fan of pithy statements that are supposed to make us financially secure, both for the simple reason that they are unlikely to help me – or, you – achieve a Number (i.e. retirement nestegg) amount that is large enough to live my – or, your – Life’s Purpose.

Now, if you don’t have a lot of travel and free time associated with your own Life’s Purpose, then you may be able to live nicely off $50k a year indexed (assuming that you have a $1 mill. nest-egg, in today’s dollars)  … but not me!

I aimed for – and, achieved – a $7 million in 7 year target (starting $30k in debt) because that’s what I decided that I needed (actually, calculated) … and, this blog is written primarily for those who want to achieve the same.

So, it shouldn’t come as a great surprise that I both agree and disagree with Jesse – the Debt Go To Guy– who says:

Risking $1,000 a month on a possible 8% return instead of a guaranteed after-tax ROI of 5% by paying down mortgage debt is NOT such a “Duh” decision. If you do get 8% you must pay taxes, and if you live in a state like CA, then after taxes you’re about even. Plus you have slippage… transactional fees etc for the investment / trade. So risking your $1,000 a month on 8% instead of a guaranteed after tax return of 5% is not always so smart, and a bad example.

People with double-digit interest rates on credit card debt, especially the many folks paying 20-30%+ interest, are not likely to find a better investment opportunity in their entire life than inside their own liability column. Every dollar in debt paid off is a guaranteed after tax ROI of 20-30%. Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time. What makes you think someone in debt could pull off such a stunt?

OK, that’s sound commonsense advice and hard to argue with:

– Sort your debts into high interest and low interest, and have a good crack at the high interest ones first, because the money that you save on interest is probably way higher than you could earn elsewhere. A dollar saved is a dollar earned, right?

– Now, when comparing the lower interest debts and investments, you really need to look at all the factors, such as risk, taxes, costs, etc. Often, it will be paying down the debt that wins, although I would be surprised if paying down a 5% mortgage ‘wins’ over any sensible RE, value stock, or business strategy in terms of serious wealth building.

But, I don’t really think that “Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time”. I know that Warren Buffett has produced 20%+ compound returns, and George Soros didn’t become a billionaire on less than 20% – 30% compounded returns.

That doesn’t detract from Jesse’s statement that “every dollar in [credit card] debt paid off is a guaranteed after tax ROI of 20-30%” and I do agree that it would be almost impossible for anybody except [insert: Forbes Rich 1,000] 😉

But, here’s where I disagree with Jesse:

I think Dave Ramsey provides sound advice for most people, and while I think it’s better to expand your means and increase your income instead of living like a popper, his advice has proven to help many hundreds of thousands of people to stop paying interest and start earning interest, and that’s the key.

– readers attracted to this blog are not in the same position (at least, no longer wish to be in the same position) as the ” hundreds of thousands of people” that Dave Ramsey has helped, and

– “stop paying interest and start earning interest” is not the key to reaching a large Number by a soon Date.

Look, there is nothing intrinsically right or wrong about paying interest, it’s merely a by-product of a loan that you have taken out. Just make sure that the loan produces more income than the interest expense that you paying, by a wide enough margin to account for the risk, taxes, and costs that may be involved.

This is a ‘no brainer’ when you realize that a rental property can produce income (assuming that your calc’s prove that it is all worth while … by no means the case on all – or even many – properties), and it is equally a ‘no brainer’ when you realize that borrowing money on your credit card to buy an LCD TV produces NO income, so why would you do it?

But, it takes a giant leap to suddenly realize that – for any existing debt that you may already have – paying down debt on a mortgage that costs you 5%, or a student loan at 2% may not be such a brilliant idea when an investment that can produce 15% compounded comes along and you now need to decide where to put your cash: into paying off those loans (to blindly achieve a ‘no interest’ outcome) or into the investment (hopefully, to produce an income-producing asset with excellent cashflows).

Of course, we’re making an assumption that reasonable people can achieve reasonable investment returns … but, if you think those kinds of investments are almost impossible to come by, take another look at:

– Value stocks (read Rule # 1 Investing by Phil Town),

– Real-estate (read Multifamily Millions by Dave Lindahl),

– Business (read The E-Myth Revisited by Michael Gerber).

[AJC: and, if these all sound too scary for you, just remember that over a 20 to 30 year period a low-cost index fund that tracks, say, the S&P500 will return circa 11% to 12% (yes, before taxes and ultra-low fees), and – if you are worried about risk – has NEVER produced less than an 8% return over 30 years]

I didn’t become a multi-millionaire by blindly entering into debt, but neither could I have become a multi-millionaire by blindly avoiding it … debt, for me, was a tool that I used sparingly, yet wisely.

I recommend that you do the same 🙂

Peer to Peer Lending. A 7m7y tool?

In my last post, I suggested that banks are profitable businesses because they have such a large mark-up. If they’re so great, my son asked, why don’t I simply plonk my cash into a safety deposit box and dole it out to willing borrowers like some kid with a lemonade stand?!

Why not, indeed?

The simple and obvious answer is risk, which the bank handles, I said to my son, with a combination of volume (to spread risk), people (to manage risk), and systems (to assess and ‘price’ risk).

However, Rick Francis offers perhaps a better-lemonade-stand-solution (?) … Peer-to-Peer Lending:

There is a fairly easy way to become the bank- peer to peer lending. It doesn’t remove the risk of default but does allow for diversification and there is a framework to asses the risk. They break loans into many small pieces that different individuals fund, so you don’t risk too much on any one loan.

Yep, P2P Lending certainly helps to address one of the banks’ three mechanisms for handling risk: you can spread your loans (the bank lend $400k many/many times over … you lend $40 many/many times over).

But, what about the experienced PEOPLE? It can take some time/trouble to sift through all of those loan apps listed on the leading P2P sites, as Jake points out:

P2P lending requires you to pick through hundreds of loan apps, and filter it to the set that you believe has the best risk / return ratio.

Then you have to diversify – invest in many loans so that a single default will not wipe you out. I think that you should invest no more than 1% of your portfolio into a given loan – so lets say you need to invest in at least 100 loans. Unfortunately, that requires you to pick through probably 1,000 applications hand-by-hand (you already discard the vast majority based on search criteria).

That’s frankly just too much work to be worth it, no?

it’s worth it for the bank, but probably not worth it for you and me (even though you can filter/sort the loan applications by various criteria) ‘just’ to get that 10% return that Rick has experienced …

And, we still haven’t addressed the risk management SYSTEMS that the bank applies, what does P2P offer there? Many sites, as Rick pointed out, offer some sort of FICO-based ranking, but banks rely on a lot more than that (for example, where’s that little thing called ‘collateral’?!) …

The only compensation for these last two (PEOPLE and SYSTEMS), that I can see, is that P2P borrowers may not want to default for a combination of:

– Getting locked out of the P2P sites … perhaps a similar mechanism to eBay’s Rating system is available?

– Perhaps it’s enough that P2P borrowers appreciate the opportunity that they have been given and don’t wish to abuse it by defaulting?

It is perhaps these two reasons that help to explain why micro-lending in 3rd world countries has such a low default rate?

But, it’s the simple logistics that Jake pointed out that put the kibosh on P2P for me …

Have you had any experience with P2P and would you use it again?

The time of your life?

time-price-I’ve been spending the last few days reacquainting myself with Millionaire Mommy’s excellent blog, but I do see some differences in perspective – even though we are both millionaires …

…. but, I suspect that the differences come from degree: she describes herself as a ‘self made millionaire’ … and me a ‘self made multi-millionaire’.

IF this is the case, then I suspect that my point of view and that of, say, Felix Dennis (who is worth hundreds of millions) will equally vary from time to time. Which leads me to my first Rule of Advice:

Only seek financial advice from those who have made at least 10 times what you have already achieved, doing exactly what it is that you are attempting to do.

A long winded-way of saying: only listen to somebody who’s already been-there-done-that …

…. but, more than that: when you get to, say, $3 million or $4 million of your own, you should probably stop reading this blog, as my ideas and your may become self-reinforcing – hence self-limiting.

At that point, it will be time to move on and find some new mentors (maybe even Felix Dennis, himself?!).

The flip-side is that if you are still working towards your first million (say, $100k or networth or less) you probably should be reading Millionaire Mommy’s blog as well as (dare I say, instead of?!) mine; to help you decide which is right for you, let me give an example from a recent Millionaire Mommy post:

Today, I’m sharing a trick that can completely revolutionize your spending habits by changing the way you see the cost of the goodies that merchants want to sell to you.

Here’s the trick: Translate the number of dollars you see printed on a price tag into the number of hours the purchase will require you to work for it. By doing so, you’ll make well-informed decisions regarding what you’re willing to pay for with your irreplaceable life energy.

You should read her post thoroughly to understand it properly – and it’s another excellent “hold back your spending” technique to go along with others such as the Power of 10-1-1-1-1.

But, I wouldn’t use it …

… now.

I may have – if I knew of it – before … but, not now.

You see, when I was concentrating mainly on MM101 (getting my financial house in order), this time value of money approach would make perfect sense, but now that I am transitioning from focusing mainly on MM201 (income and wealth acceleration) and MM301 (protecting my wealth) I think the idea doesn’t make great sense:

Picture 2

I ‘pay myself’ a notional salary of $250,000 a year – this is really a budget for now, as we get our financial house in order after a transition from business to retirement and from the USA to Australia – and have few, if any, ‘business expenses’.

But, for the sake of the calculator, I said that I worked about 20 hours a week on ‘work’ (business/investment projects), and probably spend another 5 hours a week in social activities related to this ‘work’.

Given all of that, the calculator says that my time is worth about $105 an hour … poppycock!

The test is: would I take a job, consulting activity, etc. that paid me $105 per hour? Of course not!

Would I spend time on an activity that could produce me $105 per hour passively? Probably … but, then I wouldn’t be working 20 hours a week to get it, so the calculator doesn’t work.

In other words: I ‘work’ 20 hours a week for (a) fun and (b) a potential future payback in the millions. So the calculator doesn’t work.

Secondly, if I work 40 hours (i.e. 2 weeks), I can afford $4k worth of goodies …. even I don’t buy $4k worth of consumer cr*p every 2 weeks, and on this calculation, I only have to ‘work’ for 30 weeks to buy a Ferrari … cool! Yet, right now, I don’t think I can really afford one 🙁

Thirdly, and this is for everybody, the calculator only takes into account work-related expenses; it should really also take into account your living expenses, as well … in other words how many hours of work WILL you have to put into saving up enough to pay for that thing that you are considering buying?

If none of this makes sense, here’s some more white noise for you 🙂

Safe as houses?

Picture 2Well, I did ask for it, and the first cab off the rank for the ‘diss Adrian party’ is Dan who thinks that one of my favorite posts – Contrary to Popular Opinion, Paying Off Your Mortgage Is The Dumbest Move You Can Make – is ‘ridiculous’. Seriously, thanks for opening up an important new discussion with this comment, Dan:

This is ridiculous. The author apparently believes he is untouchable and will never lose his job, get sick, or die.

You can do all the complex math you want, but the simple fact of the matter is that Risk is the biggest variable, and I don’t see it show up in your equation once.

Don’t be stupid America, and dont prescribe to a system that encourages you to continue owing people money long after you need to.

Pay off your house, free up some income, then pay off your credit cards, pay off your car, and be a happier, less stressed individual.

Hmmm …. paying off your mortgage as a ‘risk management tool’?

Before we even consider why anybody in their right mind would pay off a (say) 8% mortgage before paying off a (say) 19% credit card or car loan, let’s review the substance of my “don’t pay down your mortgage early” argument:

Look at everything that you own as a business: if it’s your own home, separate the ownership of the property in your mind from it’s use …

… for example, even if it’s your own home, treat yourself as your own tenant and figure the rent that you would otherwise had to pay when doing the sums.

Then evaluate the investment against any other investment or ‘business’ …

… but, if you’re still trying to get rich(er) quick(er)?

If you own a home, don’t pay it off … use the upside to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

If you have other sources of income (businesses, investments) don’t spend it or reinvest all of it … use some of the spare cash to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

That’s my advice to you, but only take it if you want to be rich!

But, Dan says that the ‘math’ matters not, you should consider what happens if you “lose [your] job, get sick, or die”. Well, what happens?

If you have paid out your mortgage, your money is locked in the safest bank vault imaginable … all you have to do it sell the home to access the cash. Just pray that the market is an up market and not a down market, when these events outside of your control force you to sell. Or, would YOU prefer to choose the timing? Hmmm …

Of course, you could just borrow some money against the house; but then, aren’t you now putting yourself in EXACTLY the financial situation that Dan wants you to avoid: i.e. “owing people money long after you need to”?

And, even if you still do want to use your Zero Mortgage Bank, what are the chances of the bank actually lending you (or your survivors) any money when you are jobless, sick, or dead?

Oh, and let’s say that you do happen to be unfortunate enough to “lose [your] job, get sick, or die” while you are still in the 10-15 year period when you are well ahead of the 30-year payment curve, but haven’t paid off the mortgage in full, yet? How easy will it be to refinance, or even convince your bank to hold payments for you? Even if you THINK they will, you had better be certain 😉

What do you reckon? Dan’s on the right track? C’mon, be honest … would you feel safer paying off your mortgage early, or letting it ride?