Never Regret A Paid Off Debt

Debt is a tool to grow wealth and vice that can prevent prosperity. A paid off debt is never something to regret. Because a paid off debt is one less thing to worry about. And if you don't like being debt-free, you can always go back. Handcuffs.Over the years, I’ve been indebted many times for one reason or another. Mostly car loans and a few mortgages, but sometimes personal loans too.

After college, my parents lent me $5,500 to buy a used Mazda. The interest rate was better than a traditional car loan so I was grateful to take the deal.

But I paid that thing off as fast as I could. I didn’t want it hanging over me.

After traveling overseas for 14 months, I bought a brand new car with zero money down and a $221 monthly payment. I paid that 5.5-year loan off in 2.5 years.

Then just last year, we eliminated our minivan loan in one big payoff chunk. It was suffocating our cash flow even though the interest rate was just 0.9%. Felt great.

I’ve had HELOC debt, short-term loans from the bank of Mom and Dad, and even some minor credit card debt after college. I paid each debt off early.

I’ve paid extra payments to our mortgages to optimize refinancing opportunities a few times too.

Each extra payment was a sacrifice. Money from our budget went to the debt instead of more beer, more stuff, more investing, or even more travel.

But you know what? I’ve never regretted one dime I put toward early debt payments. Not one.

Drink the Debt-Free Kool-Aid

Somewhere along the line, I drank the debt-free Kool-Aid. Partly because of something my Dad said when I was an impressionable teenager. Then before I found podcasts, I had a satellite radio. The only money talk show I could find was Dave Ramsey.

His argument for a debt-free lifestyle is so rehearsed and perfected that listeners are hypnotized to never borrow money again.

But math and spreadsheet wizardry are constant temptations to go against the debt-free lifestyle. Because the numbers work.

For example, two years ago my bank offered a 1-year home equity loan at 0.9%. At the time, I was earning more than 10% investing at Lending Club (now my returns are around 8.2%).

The math told me to take the deal and put the proceeds into peer to peer lending notes.

I didn’t.

Had I borrowed money and invested it in Lending Club notes or stocks, I’d be wealthier… albeit with more heartburn.

The same would likely hold true today. Right now I’m passively earning more than 8% on investments in both Fundrise and RealtyShares that are backed by real estate. Why not borrow low and invest?

Isn’t that what rich people do? Isn’t that what banks, corporations, and private equity firms do too?

Yeah, pretty much. But leveraging up to invest involves risk. And stress. So I resist.

When there’s a sustained bull market like the one we have today, it’s easy to forget about the risks of debt and investing.

Even if I borrow for something like a car, I always end up paying the loan off early because the debt makes me uncomfortable. Debt-free does not.

Paid Off Debt Regret

Debt repayment regret is real. I’ve discussed this with a number of friends who made early payments on low-rate student loans or mortgages, only to wish they’d invested the cash and let the debt ride.

These conversations always happen in good times when jobs are plentiful and the stock market is strong.

Over long periods of time, the math absolutely works in favor of keeping debt to term if the interest rate is low.

Stretch a low-interest mortgage (less than 5%) over 30 years and earn 9-10% in the stock market, and the advantage looks obvious. Then consider the tax benefit of mortgage interest and it’s even better.

Same with low rates on student loan debt.

However, 30 years is a long time. Plans change. I’ll be 70-something when our mortgage term ends. I don’t expect to be 100% in stocks at that age. My risk appetite will decrease, so my average returns should decrease in exchange for stability. 5%-6% is more realistic target return when I reach 60-years-old.

If my mortgage rate is 4%, I’d be putting money at risk to earn an extra 1%-2%. While paying down the debt is a guaranteed 4% return.

And that’s a super-low rate. In previous decades, rates were much higher. Those rates may very well return.

Imagine your mortgage rate is 8%. Would you be as eager to risk your money to earn 9-10% from stocks?

My goal to retire at age 55 assumes I’ll be debt-free, including the mortgage. We’re a long way away from that, but I’m confident I won’t want that payment. I’ll already have enough recurring payments with health insurance and property taxes.

There’s a correlation between debt and stress. To truly reach financial freedom, the handcuffs need to go. For me, at least.

If I regret it, I can always go back into debt.

Debt is a Tool and a Vice

Debt is a tool to accelerate building wealth. This is especially true in real estate and business. I use debt for my rental property.

But it must be used strategically to build wealth.

Probably 90%+ of Americans don’t think about debt strategically. They use it to buy things they want now instead of waiting to pay cash. Cars, stuff, a bigger house, education etc. It can become a vice when you over-borrow.

Debt carries a few burdens that can create discomfort in your life.

  • The borrower is slave to the lender; this holds true as a tool or vice
  • Debt requires recurring payments, i.e. money obligations from you to someone else
  • Debt causes bankruptcy and epic stress when economic conditions sour
  • Debt inhibits cash flow

This is all fine if you’re in control of your money and life and borrow conservatively. Us finance nerds pay close attention. The vast majority of people do not.

A paid off debt is one less thing to worry about. Who doesn’t want that?

Problems happen when using debt as a tool too often becomes a thorn in your side. Then a dagger.

Used correctly and you can build solid and stable wealth. However, for a long as you hold the debt, you’ll always be on the hook, regardless of your net worth. Being on the hook for anything is not my idea of freedom or retirement.

Conclusion

I have never regretted a paid off debt. As much as I respect the math, holding debt carries emotional baggage for me. Maybe because of my pursuit of early retirement. Or maybe it’s because of a deeply rooted bias from high school or a radio show I used to listen to.

There’s more than one way to wealth. Some paths are more volatile than others. I’ve always preferred slow and steady progress because that fits my lifestyle.

I don’t work long hours. I get home early and play with my kids. I use all my vacation time and find ways to take more than my allotment.

Too much debt requires too much attention. So the less debt I have, the more I can focus on what’s important to me.

Borrowing money to growth wealth can make sense on an elaborate spreadsheet. And that opportunity is ALWAYS available. Borrowing takes a few clicks, a swipe, or a phone call.

Paying off debt is hard work. You struggle to make that extra payment. Then again and again and again and again and again until it’s gone. The older I get, the more I want it all to be gone.

19 Responses to Never Regret A Paid Off Debt

  1. mrfrugalfather April 12, 2017 at 7:45 am #

    I always struggle with debt as a tool. Like you I like not having the burden of payments but sometimes I think I can get a better return. My current situation is that I’m thinking about doing a equity loan to finance my first, well second, rental property but I’d hate to loose on that. Thanks for the insite!

    • Retire Before Dad April 12, 2017 at 8:46 am #

      MFF,
      I’m definitely not against financing an investment. If you can make it work, go for it. There’s always opportunities. Once that investment matures, the itch comes along to rid of the debt to simplify things. For me, that happens. Some people love debt and see more as a vehicle to become more wealthy.
      -RBD

  2. Dan April 12, 2017 at 8:41 am #

    Debt is stress and takes away from my quality of life. The only debt now is a mortgage which I itch to pay off in a lump sum. I let that ride.

    • Retire Before Dad April 12, 2017 at 8:48 am #

      Yeah I prefer the lump sum method too. Build enough cash and investments to pay the damn thing off. Do it when your ready or let it ride. I suspect I’ll make that plunge a year or two before early retirement. My views could change by then though!
      -RBD

  3. brian503 April 12, 2017 at 10:38 am #

    You have to factor the mental piece of debt. Such a stress reducer to be free of it. It’s one of the main things I factor before adding an new debt. Sure a low interest rate mortgage makes sense, but I still want the debt gone.

    • Retire Before Dad April 12, 2017 at 11:40 am #

      You’re the authority on this very subject. Thanks for chiming in!

  4. Ty Roberts April 12, 2017 at 11:38 am #

    I have one very low interest student loan that I’m not paying off because doing so would require me to pull money from an account that is generating for more interest than the student loan is costing me. That’s where my strategy with debt ends. I don’t have the appetite to take on debt for investment purposes – I’m too risk averse, even if the math comes out in my favor.

    • Retire Before Dad April 12, 2017 at 11:47 am #

      Ty,
      That’s what I had in mind when I wrote this. If the payment is really low, I get paying the minimum. If the payment is high, like my car payment was, that would make me uncomfortable. Then again, I never had student loans so my perspective may not be best if that kind of debt.
      -RBD

  5. Amy @ Life Zemplified April 12, 2017 at 7:21 pm #

    I’m with you, I don’t like debt either. Thankfully we’ve eliminated it all but the mortgage. I’ve gotten a few loans in the past thinking I would just make the payments because the interest rate was low and save/invest more, but it would make me uncomfortable to have the debt sitting out there so we’d work to pay it off. A mindset thing I guess. I just know it makes me feel better when it’s gone.

    • Retire Before Dad April 13, 2017 at 11:13 am #

      Amy,
      Totally. It’s hard to explain. Even though it makes sense by the number, I don’t want that shadow of debt. The mortgage is fine enough for now.
      -RBD

  6. Dividend Diplomats April 12, 2017 at 7:54 pm #

    RBD –

    Love the post. Just a week or so ago – I’ve decided to pay off my auto loan within the next 6 months instead of waiting another 20+ to pay it off. Hate that I have a payment on an asset that provides little value to me. “She gone” is what I say!

    -Lanny

    • Retire Before Dad April 13, 2017 at 11:16 am #

      Lanny,
      My car payoff was expensive. It was difficult to do. And even in hindsight, it would have better to invest the money in stocks (as of today). But I feel much better because my cash flow is way more fluid now.

      BTW, great month of income for you. Keep fueling the machine!
      -RBD

  7. Rich from www.pennyandrich.com April 13, 2017 at 2:30 am #

    The only time debt has worked well for me is when there is a “big chunk” investment opportunity (like real estate) and I need $10K or so to get it started without pinching my cash flow too much. So I’ll take one of the many 0% direct deposit offers, and pay it off over 12 month. The trick is paying it off rather than rolling it … which I’ve done before … and then it becomes an annoyance.

    • Retire Before Dad April 13, 2017 at 11:24 am #

      Rich,
      It takes discipline to pay off zero interest loans. Proper for doing a deal like that and creating more cash flow. $10,000 doesn’t cut it near me for new real estate deals. So it would have to be a bigger chunk which maybe I’d do for the right deal. Have t been looking much lately though.
      -RBD

  8. Financial Velociraptor April 13, 2017 at 1:04 pm #

    Debt free and loving it.

  9. mamafishsaves April 14, 2017 at 6:50 pm #

    There is a reason equity investors get upset when a company doesn’t “use their balance sheet” and carry some leverage. Debt can be a powerful tool. The problem is, individuals don’t have a Board of Directors keeping them in line. For individuals, the peace of mind factor of being debt free is huge.

  10. retirebyforty April 19, 2017 at 12:21 pm #

    I don’t like borrowing to invest either. It makes sense, but it’s too risky for me. Life is pretty good for us and I probably should keep doing what I’m doing. It only takes one big mistake to screw up our retirement fund. Not worth it.
    We have a mortgage and I’m not in a hurry to pay it off.

  11. Millennial_Boss April 23, 2017 at 1:30 pm #

    I’ve never heard anyone say they regretted paying off debt but I guess there are many kinds of people out there. Being debt free feels really good and is less to worry about as your mentioned. The less bills in my life, the better.

  12. MrDoublingDollars May 10, 2017 at 6:18 am #

    I only have a (small) mortgage hanging over my neck, otherwise no debt! I never hesitated paying off my last car loan (1.9%) early.

    Sure, people bring out the calculators and charts to show that keeping the low interest debt and investing is a ‘better’ decision. To me, nothing is better than not owing those monthly bills.

    Now to just get rid of the mortgage…

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