Over the years, I’ve been indebted many 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 that thing off as fast as I could. I didn’t want it hanging over me.
Then not long ago, 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%. The last payment felt great. I’ve sworn off car debt for the rest of my life.
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 an impressionable teenager.
Then before I found podcasts, I had satellite radio. The only money talk show I could find was Dave Ramsey.
His argument for the debt-free lifestyle is so rehearsed and perfected that listeners are hypnotized never to borrow money again.
But the math is a constant temptation to reject the debt-free lifestyle because the numbers work.
For example, my bank offered me a 1-year home equity loan at 2.99% last year. At the same time, I can earn 8% investing in first-lien real estate debt at PeerStreet.
The math told me to take money from the HELOC and put the proceeds into real estate crowdfunding debt.
But I didn’t.
If I borrow money at 3% and invest at 8%, 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 up to invest involves risk. And stress. So I resist.
When there’s a sustained bull market like the one we still 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 the longer I hold it.
Debt-free does not 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 5%) 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 the condo, I could put some of the proceeds toward our home mortgage. But that’s not on the top of my 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 condo mortgage is gone, I feel a huge weight lifted off of my conscience.
Only one debt to go.
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.
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 a slave to the lender; this holds 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 complication. A simpler financial life. Who doesn’t want that?
Problems happen when using debt as a tool becomes a thorn in your side. Then a dagger.
Used correctly and you can build stable wealth. However, for as 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 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 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.
Photo via Pixabay