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