Over the years, I’ve been indebted numerous times for one reason or another — mostly car loans and a few mortgages, but a few 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 the loan off as fast as I could. I didn’t want it hanging over me.
Not long ago, we paid off our minivan loan in one big chunk. It was suffocating our cash flow even though the interest rate was just 0.9%. The last payment felt great, and I’ve sworn off car debt for the rest of my life.
I paid each debt off early.
I’ve paid extra mortgage payments and reduced our home loan balances while refinancing 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 about credit cards when I was a teenager.
Before I found podcasts, I had a satellite radio subscription. The only money talk show I could find was The Dave Ramsey Show.
Dave’s argument for the debt-free lifestyle is so rehearsed and perfected that listeners are hypnotized never to borrow money again.
But math is a constant temptation to reject the debt-free lifestyle.
For example, my bank offered me a 1-year home equity loan at 2.99%. Long-term stock market returns average 9%.
The math told me to take money from the HELOC and put the cash into the stock market.
But I didn’t.
If I borrow money at 3% and invest at 9%, and do this successfully over time, I’ll 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 to invest involves risk and stress. So I resist.
During a sustained bull market like the one following the financial crisis of 2008-2009, it’s easy to forget about the risks of debt and investing.
When I borrow, I always pay the loan off early because the debt makes me uncomfortable.
Being debt-free doesn’t make me uncomfortable. It empowers me.
Paid Off Debt Regret
Debt repayment regret is real. I’ve discussed this with 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 happen in good times when jobs are plentiful and the stock market is strong.
Over long periods, the math works in favor of keeping debt to term if the interest rate is low.
Stretch a low-interest mortgage (less than 4%) over 30 years and earn 9-10% in the stock market, and the advantage is obvious. Then consider the tax benefit of mortgage interest, and it’s even better (though less so after the latest tax reform).
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 reduce in exchange for stability. 5%-6% is a 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 risk-free 4% return.
That’s a super-low rate. In previous decades, rates were much higher.
Imagine your mortgage rate is 8%. Would you be as eager to risk your money to earn 9-10% from stocks?
Now that I’ve sold my investment property, I could put some of the proceeds toward our home mortgage.
But that’s not at the top of my priority list. I may make small monthly extra payments to reduce the total number of payments and hopefully give me the realistic option to pay it off in one lump sum someday.
In retirement, I’ll already have enough recurring payments with health insurance and property taxes, so I’d prefer not to have a mortgage too. But it’s a long road to be mortgage-free.
There’s a correlation between debt and stress. Now that my investment property mortgage is gone, I feel a huge weight lifted off of my conscience.
The only debt left is our home mortgage.
To truly reach financial freedom, the handcuffs need to come off.
If I regret paying off the mortgage early, 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 used debt for my rental property, and it made me wealthier.
But it must be used strategically to build wealth.
Most people 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., can all become a vice when you over-borrow.
Debt carries burdens that create discomfort in your life.
- The borrower is a servant to the lender; this holds as a tool or vice
- Debt requires recurring payments — 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.
Financial nerds pay close attention. The vast majority of people do not.
A paid off debt is one less complication. Who doesn’t want a simpler financial life?
Financial problems and stress worsen when debt becomes a thorn in your side. Then a dagger.
Debt can help you build stable wealth if used wisely. However, as long as you owe money, you’ll always be indebted to the lender, regardless of total wealth.
Financial freedom and retirement are hard to imagine while still in debt.
I have never regretted a paid off debt.
As much as I respect the math, servicing debt carries emotional baggage for me. Maybe it’s because of my desire to retire early or a deeply rooted bias absorbed from my Dad or a radio show host.
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 to play with my kids, use all my vacation time, and enjoy myself.
Too much debt requires too much attention. So the fewer debt obligations I have, the more I can focus on what’s important to me.
Borrowing money to grow wealth can make sense on an elaborate spreadsheet — and that opportunity is ALWAYS available. Borrowing money takes a few clicks, a swipe, or a phone call.
It’s a sacrifice to make extra payments every month until a debt is gone, but the reward is empowering.
The older I get, the more I want all of my debts to be gone.
Photo via Pixabay
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