Mortgage be gone!
Week in week out now I have some quite in depth conversations about money and how it affects people personally. People present me with a lot of “what if” scenarios and we have a back and forth around possible outcomes of different decisions. It never gets heated, it is just a sensible conversation about different ways to use money in your life. I love it and these conversations really motivate me and inspire me to help other people.
However there is one conversation that often turns up the pressure, particularly when I’m talking to people who are better at math than me. It is when people tell me that they are investing money in order to get a return but at the same time they still have a mortgage. My short and sweet response is typically that “in my humble opinion, you can’t make money while you owe money”. The exception to this is if you are a hot shot banker with a team of investment boffins behind you; but even then it doesn’t always work out.
Once I’ve uttered my opinion the fireworks often start.
It’s generally a much better show when the conversation is in person, but you can still feel the pressure via email that is for sure. And the reason people flat out disagree with me is because of math, because when you look at it in its most pure form, if your mortgage is charging you 5% and the NZ share market return is 13% you would almost, I have been told several times, “be an IDIOT to pay your mortgage off faster. It makes a lot more sense to invest instead. It is l o g i c a l”!
To which I would reply, “nope, you still have debt, pay your debt of first and THEN invest”.
Now, I understand the math, I do, but it fails to take into account a lot of other factors and we humans have a lot of other factors to clutter up our lives.
If the math was as simple as I have set out here then it’s blindingly obvious that you make more from your investment than you incur in interest from your mortgage:
So, my advice would be that it would also be blindingly obvious that you should immediately go to your bank and borrow AS MUCH MONEY AS THEY WILL LET YOU HAVE and you should invest that as well. Because take a look, the math does not lie! You would be an IDIOT to let THIS INCREDIBLE opportunity go by!
Here is what it looks like if you were to borrow a million:
Some will look at this and say “are you crazy, that is so RISKY”, others may think I’m onto something here.
So, while you rush off to your bank and start to fill out the screeds of paperwork to get this excellent “money making lending” (that’s a new marketing term I’ve just created for the banking sector) in place (please don't!) I want to refer to a conversation that Jonny keeps bringing up. He has asked me many times to write a blog on “getting people to understand why having NO debt is such a good idea”. This is indeed an excellent idea for a blog post but far harder to write than I ever imagined because when I’m faced with someone saying “why would I pay off my mortgage when interest rates are so low, I’m much better off to invest”, they are focussed on the math when I’m taking a far wider look at things.
When I was having a heated debate about all of this very recently with some very good friends, who are also mathematicians, we went on and on, back and forth, up and down, round and round, all the while getting louder and louder discussing investment returns versus low mortgage interest rates versus payback periods and COMPLICATED MATHEMATICAL GYMNASTICS regarding their financial lives and DON’T EVEN GET ME STARTED on the fact that there is a 0% interest student loan involved that the plan is to NEVER payback (“why would you Ruth???!!!”).
It was exhausting and when all was said and done and none of us agreed with each other I asked if we could now have a conversation about how MY debt is structured instead, please.
Oh, that’s right, I have none because I paid it back as fast as I possibly could and have never had to ask a bank for anything since. Well that was a short conversation. Now friend, fill up my wine please, all this talk has made me extremely thirsty!
Now, the friends I mentioned are wonderful and extremely intelligent people and we ended our debate having all enjoyed ourselves but we had to agree to disagree. Now, I know they will be reading this, so here is the point I want to get across…
Your calculations fail to take LIFE and RISK into account.
I’m 44 (yep, still young and awesome) so it stands to reason that many of my friends are around this age too. And at this stage of life for many of us the family situation tends to be stable, the job situation tends to be stable, the repayments to the bank are on autopilot. But I also know a huge amount of people in this age bracket and in different stages of life and they are in a position to tell you that stability does not last, things will change and your ability to deal with them changes too.
I see people keeping debt hanging around for ten, twenty, thirty or more years like it is an old friend. People are so comfortable with the math of handing over half of their pay cheque each week that “it’s just the way it is”. At my workplace there is always a radio on and during every single advertisement break, banks are advertising how easy it is to borrow money. WE are constantly told that if you rent, its dead money, yet if you pay mortgage interest (i.e. rent to the bank) its seen as “good debt”. It’s just what we do, it’s how we live right? In my view, WRONG, we need to treat debt as a phase of life and move away from it as quickly as possible. I view debt as extremely risky because when disaster strikes it just COMPLICATES things.
I think of debt as a tool to be used wisely and then discarded quickly and to now have no further use for. Because I see that people get far too comfortable with it and so many of us have it within our power to pay it down quickly and get on with life and we choose not to, instead it is always there, its routine and regular but in my experience our lives are not. Our lives grow, change and evolve and in so many instances I’ve seen debt become a huge burden:
- A marriage ends
- A partner dies suddenly or becomes seriously ill
- You become seriously ill
- A job is lost
- A home repair bill exceeds your expectations and bank balance
- Aging parents need full time care or they need YOU
- Mortgage interest rates increase
- A bank calls in a loan
I have seen all of the above happen (and experienced some of it myself) and for the people involved it is terrifying. Suddenly this smooth routine is disrupted and when their energy should be spent coping with the event itself it is instead coping with the financial fallout.
Investment vs Debt is not a clean cut argument anymore.
Having no debt means you have choices and freedom and cash on hand to help you enjoy life or cope with any crisis that will inevitably appear. It means that the sudden death of the breadwinner of the family does not make your immediate problem money and have you scrambling to find ways to move money around to keep the mortgage payment current or work out whether the insurance policy is enough to cover it or that the house may need to be sold. No debt means that the immediate problem is instead coping with the crippling emotional loss of a life partner and your focus is purely on getting through that. That is where your focus should be.
When you have no debt all the money that you make is your own and you get to decide what you want to do with it. Simple. When my pay comes in there is no math involved. I don’t have to carve off half of my wages and give them to the bank. My black and white opinion of debt is that it should be treated as a household emergency and what do you do in an emergency? You do everything in your power to make it STOP.
While we are healthy and earning well, this is the time to pour all of our resources into clearing debt and then building wealth, so many people I speak with don't do this and they come to regret it as soon as they realise their best earning years are GONE and they still have debt. If extra money was poured into debt repayment instead of investments you will kill off the mortgage quickly and then you would be back investing before you knew it AND you would then have EVEN MORE money to throw at investments. Paying off the family home is just one stage of life, there are so many other stages to prepare for and enjoy, so why do you let it take up so many years of your life?
Having no debt puts me financially in control of my own life, not a bank and to be honest I just got FED UP with paying them so much freaking interest, even if the rate was low. Now I earn interest instead.
I have been asked many times if I still have lending in place or a line of credit for JUST IN CASE? Well, “just in case” has happened to me a lot in the last couple of years and I have never had to phone my bank begging to borrow money. Once debt is cleared money can’t help but accumulate because I stopped giving it away each and every week. So, NO I don’t need to lend money, I’m perfectly capable of taking care of myself now and I don’t turn to a bank as a crutch to prop myself up. I have a healthy emergency fund on hand if required.
We used to do a lot of things which were a great idea at the time but we now know were dumb like: Drive drunk, tan without sunscreen, smoke, didn’t wear seat belts, bloodletting, mercury as a health cure, cocaine in coke.
Will we look back after paying off a mortgage for 30 years and realise we have paid it back twice and think “shit that was a pretty DUMB thing to do”? Will we think “gosh, every time there was an ad break on the TV someone was trying to lend me money, maybe they had an ulterior motive”?
Paying of debt and becoming debt free should be handled like pulling off a sticking plaster. Quickly, because the longer you take to pull it off the more painful it will be.
So, finally to answer my husband's question of “can you please explain to people why being debt free is so freaking awesome”...
The borrower is ALWAYS a slave to the lender - no matter what way you work the math the lender always wins.
Owning what you have gives you choices to do whatever you like with your own money and your time.
You never worry about money anymore or have to do complicated math.
Working becomes optional.
Your time is your own and you don’t delay things that are important to you.
Family becomes priority.
There will be no more heated discussions about mortgages and debt!