The Wrong Way to Think About Debt - The White Coat Investor

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dml130
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by dml130 »

I can get behind the idea of paying off my mortgage when the time is right, maybe a few years from now. But for now I'm relatively early on in my career, and I don't like the idea of most of my net worth being locked up in the equity of my home.
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Ben Mathew
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Ben Mathew »

mak1277 wrote: Tue Oct 13, 2020 12:58 pm
I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
I agree that for small ticket items, it doesn't make much of a difference. Whether you buy a phone with cash or use a 0% offer won't really matter. Chasing these minor things may take up more mental space than it's worth, unless it's a hobby (which I think it is for some).

But the big one for most people is the mortgage, and that can have a large impact. A young person who doesn't invest in stocks and instead focuses on paying off the mortgage first is leaving a non-trivial opportunity for diversification on the table. Their financial outcome will be more dependent on the performance of the stock market in the shorter span into which they compressed their stock market exposure.

It still might be the right decision for that person for psychological/emotional reasons . Some people simply value not having debt. But there can be a non-trivial financial cost to doing that.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by willthrill81 »

mak1277 wrote: Tue Oct 13, 2020 12:58 pm
I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
I agree on both counts. The advantage gained by leveraging one's investments via a mortgage is not likely to move the needle much, and the peace of mind gained by being debt free can easily be greater than that gained by having a slightly larger portfolio.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by flaccidsteele »

The article focuses on debt for non-productive assets and people who trade their Life for money at a job

In that context the article is fine

For wealthy medium-to-large businesses owners, the article isn’t as useful or relevant

It’s an article for the 99.9% and serves its purpose
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by smitcat »

mak1277 wrote: Tue Oct 13, 2020 12:58 pm
I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
In our case ....
"1) Are you rich yet?"
Well the idea of 'rich' is relative but I would say yes here.

"2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?"
Yes - but at times the debt was higher than 2-4%.
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Steve Reading
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Steve Reading »

Ben Mathew wrote: Tue Oct 13, 2020 2:40 pm But the big one for most people is the mortgage, and that can have a large impact. A young person who doesn't invest in stocks and instead focuses on paying off the mortgage first is leaving a non-trivial opportunity for diversification on the table. Their financial outcome will be more dependent on the performance of the stock market in the shorter span into which they compressed their stock market exposure.
Ben, isn't it the case that mortgages also have an inherent call option due to the ability to prepay based on prevailing interest rates? When you prepay a mortgage faster than the terms and conditions, you're effectively selling that call option on interest rates for zero dollars.

Thanks for your thoughts.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EnjoyIt »

willthrill81 wrote: Tue Oct 13, 2020 10:23 am The 'justification' argument that Jim makes is the same one that I've made here several times as well. Many claim to be investing the difference, and some are, but I don't doubt that some do not. Like many aspects of personal finance, it really pays to know oneself.

If someone truly is retaining low-interest fixed debt (e.g. mortgage) in order to buy stocks or rental real estate, then they are likely to improve their returns. But I've lost count of the number of people I've seen who are retaining such debt to buy bonds. The most frequent claim is that they want to retain liquidity, and this can be a valid reason, but I think that many BHs place too much value on liquidity, especially when they have a sizable portfolio. Further, having no debt can substantially decrease one's need for liquidity.

For instance, now that our mortgage is paid off, we could cover all of our essential spending from our state's regular (i.e. non-COVID) unemployment benefits, which last for six months, and I would gain penalty-free access to my 457 plan as soon I separated from my employer. We are well insured on all fronts. Consequently, we don't need much liquidity and don't retain a lot of readily accessible assets.
We did not follow WCI's advice with regards to debt. Out of residency we did not buy new cars or buy a fancy home. We rented and we only paid down loans that were over 4%. Everything else got invested. We slowly increased our lifestyle over the years while still keeping the debt. We eventually got a 2.75% mortgage putting nothing extra into it. After years of saving and now being financially independent we finally paid off our mortgage but still holding a 1.5% school loan. The decision worked very well for us and if one can manage themselves into saving instead of spending the difference then I would recommend our path as opposed to WCI's.

On the other hand many many physicians are living paycheck to paycheck. For them his advice is spot on.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by HootingSloth »

mak1277 wrote: Tue Oct 13, 2020 12:58 pm
I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
Last edited by HootingSloth on Tue Oct 13, 2020 4:00 pm, edited 1 time in total.
mak1277
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mak1277 »

flaccidsteele wrote: Tue Oct 13, 2020 2:51 pm The article focuses on debt for non-productive assets and people who trade their Life for money at a job

In that context the article is fine

For wealthy medium-to-large businesses owners, the article isn’t as useful or relevant

It’s an article for the 99.9% and serves its purpose
It's about personal finance, not the use of leverage in running a business. I don't think it pretends to be anything other than what it is.
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Ben Mathew
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Ben Mathew »

Steve Reading wrote: Tue Oct 13, 2020 3:02 pm
Ben Mathew wrote: Tue Oct 13, 2020 2:40 pm But the big one for most people is the mortgage, and that can have a large impact. A young person who doesn't invest in stocks and instead focuses on paying off the mortgage first is leaving a non-trivial opportunity for diversification on the table. Their financial outcome will be more dependent on the performance of the stock market in the shorter span into which they compressed their stock market exposure.
Ben, isn't it the case that mortgages also have an inherent call option due to the ability to prepay based on prevailing interest rates? When you prepay a mortgage faster than the terms and conditions, you're effectively selling that call option on interest rates for zero dollars.

Thanks for your thoughts.
Yes, the fact that you can pay off the loan without penalty if interest rates fall is a valuable option--one which many are exercising right now. The lenders will have to factor that in to the interest rates / points they offer, so the loans would be more expensive than they would have been without the option. But I think your point is that mortgage rates are a bit better than they look--I agree.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Steve Reading »

Ben Mathew wrote: Tue Oct 13, 2020 3:19 pm
Steve Reading wrote: Tue Oct 13, 2020 3:02 pm
Ben Mathew wrote: Tue Oct 13, 2020 2:40 pm But the big one for most people is the mortgage, and that can have a large impact. A young person who doesn't invest in stocks and instead focuses on paying off the mortgage first is leaving a non-trivial opportunity for diversification on the table. Their financial outcome will be more dependent on the performance of the stock market in the shorter span into which they compressed their stock market exposure.
Ben, isn't it the case that mortgages also have an inherent call option due to the ability to prepay based on prevailing interest rates? When you prepay a mortgage faster than the terms and conditions, you're effectively selling that call option on interest rates for zero dollars.

Thanks for your thoughts.
Yes, the fact that you can pay off the loan without penalty if interest rates fall is a valuable option--one which many are exercising right now. The lenders will have to factor that in to the interest rates / points they offer, so the loans would be more expensive than they would have been without the option. But I think your point is that mortgage rates are a bit better than they look--I agree.
My point is that this option, just like any option, always loses money if exercised. You certainly wouldn't want to prepay the mortgage if rates go up (that's free money for the bank, so it must mean you're losing money yourself). But even if rates have dropped, exercising should lose money.

Also, because banks assume a certain level of prepayment, they probably offer this intrinsic option on interest rates at below-market price. I bet one could buy bonds and sell call options on them and come out ahead over just prepaying the mortgage. Although it would come down to the numbers, not sure how big of an inefficiency there would be.

Either way, my general point is that the ability to prepay is valuable and worth something. I suspect the benefits of Lifecycle Investing are much greater though.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Ben Mathew
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Ben Mathew »

Steve Reading wrote: Tue Oct 13, 2020 3:36 pm my general point is that the ability to prepay is valuable and worth something. I suspect the benefits of Lifecycle Investing are much greater though.
If interest rates go down, the borrower would typically refinance to a new mortgage with a lower rate (as many are doing now). Then they are doing both--taking advantage of the prepay option, as well as maintaining the leverage (and the benefits of lifecycle investing).
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JackoC »

HootingSloth wrote: Tue Oct 13, 2020 3:10 pm
mak1277 wrote: Tue Oct 13, 2020 12:58 pm
I've started pushing back on these people (and no, they don't like it) by asking them two questions:

1) Are you rich yet?
2) If you are, did carrying debt at 2-4% while investing contribute to any significant portion of it?

The answer to number one is almost always no, but even if it isn't, the answer to number two is also almost always no
I think this is the crux of it for me. Sure, intellectually/mathematically, it's optimal to keep low rate debt and invest instead. But in reality, it's not going to make a big enough difference to matter in the long run. The intangible benefits of not having debt are good enough to forego the optimal, but minimal, benefits of keeping debt, at least for me.
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
That's kind of apples and oranges though, comparing low interest rates of now with past stock returns. Stock expected returns now are lower for many of the same reasons mortgage rates are lower. Stock real expected return may be estimated as 1/CAPE, now=~3%. Add back long term inflation, maybe 5% as a round number nominal expected total return for stocks. The 30 yr (18y avg life) mortgage rate is 2.96% APR average per Nerdwallet. Some people can fully deduct mortgages that size, though many effectively can't since the 2018 tax law. Plus w/ taxable account money to spend in retirement you can't really ignore capital gains tax though it's deferred, and basis step up for heirs is very far from guaranteed to last IMO. So the net effect of taxes could be limited. The pre-tax margin of ~2% on $370k for 18 yrs average is something like 10% of $1.2mil. A favorable tax situation could raise it in a particular case, and I'm not saying it's categorically not worth it, but others could say that's not so material given their overall goals, and considering risk.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Independent George »

Meg77 wrote: Tue Oct 13, 2020 12:24 pm And I agree VERY few people, even personal finance nerds and bloggers, plop $30,000 in the stock market from savings the same day they finance a $30,000 car purchase. The reality is they hoard higher cash/savings balances and/or they spend more over time - and typically they spend more on the car itself to boot (usually you have to buy a brand new model and add warranties you may otherwise skip just to get the 0%). Very rarely are people increasing retirement contributions or other investments due to the existence of a car loan.
Few, but not none - and I would guess they are less rare here.

I actually still have spreadsheets I used to calculate how much to increase my 401k contributions to end up with the same net income when I refinanced in 2009, 2011, and 2019. I have literally invested 100% of the savings each time.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by ScubaHogg »

If by “# 4 Can't Go Bankrupt Without Debt”, the author means “if you have no debt at the beginning of an emergency, you can’t go bankrupt” he is incorrect. Lose a job while having an expensive medical emergency can drive one into debt real fast, mortgage or no mortgage. Indeed, when the news refers to “medical bankruptcies”, once you dig in it’s often the income loss couple with all the other expenses of life that really drive the bankruptcies. It’s not a ton of help to have a paid off mortgage if you are having to put your grocery bills on your credit card. Indeed, not having the mortgage could easily drive you into unserviceable debt faster if you don’t have the cash to pay your bills and can’t tap into your home equity (think: 2008).

As for the reference to life insurance and disability insurance. You don’t need to to carry meaningfully higher levels of coverage due to a mortgage if you investment balance is that much higher (ie, the amount you otherwise would have put towards your mortgage). Net they wash out.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by petulant »

How am I supposed to believe all of the thoughtful, critical comments on this thread? WCI already told me about you all. Clearly you're just 25-year-olds who aren't already rich like WCI.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by HootingSloth »

JackoC wrote: Tue Oct 13, 2020 10:13 pm
HootingSloth wrote: Tue Oct 13, 2020 3:10 pm
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
That's kind of apples and oranges though, comparing low interest rates of now with past stock returns. Stock expected returns now are lower for many of the same reasons mortgage rates are lower. Stock real expected return may be estimated as 1/CAPE, now=~3%. Add back long term inflation, maybe 5% as a round number nominal expected total return for stocks. The 30 yr (18y avg life) mortgage rate is 2.96% APR average per Nerdwallet. Some people can fully deduct mortgages that size, though many effectively can't since the 2018 tax law. Plus w/ taxable account money to spend in retirement you can't really ignore capital gains tax though it's deferred, and basis step up for heirs is very far from guaranteed to last IMO. So the net effect of taxes could be limited. The pre-tax margin of ~2% on $370k for 18 yrs average is something like 10% of $1.2mil. A favorable tax situation could raise it in a particular case, and I'm not saying it's categorically not worth it, but others could say that's not so material given their overall goals, and considering risk.
I agree that if you are convinced that stocks will return 3% real over the next 30 years, then pulling money out of the stock market is not a big deal. I do not agree that 1/CAPE is a good predictor of real stock returns over 30 year periods.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JackoC »

HootingSloth wrote: Wed Oct 14, 2020 8:48 am
JackoC wrote: Tue Oct 13, 2020 10:13 pm
HootingSloth wrote: Tue Oct 13, 2020 3:10 pm
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
That's kind of apples and oranges though, comparing low interest rates of now with past stock returns. Stock expected returns now are lower for many of the same reasons mortgage rates are lower. Stock real expected return may be estimated as 1/CAPE, now=~3%. Add back long term inflation, maybe 5% as a round number nominal expected total return for stocks. The 30 yr (18y avg life) mortgage rate is 2.96% APR average per Nerdwallet. Some people can fully deduct mortgages that size, though many effectively can't since the 2018 tax law. Plus w/ taxable account money to spend in retirement you can't really ignore capital gains tax though it's deferred, and basis step up for heirs is very far from guaranteed to last IMO. So the net effect of taxes could be limited. The pre-tax margin of ~2% on $370k for 18 yrs average is something like 10% of $1.2mil. A favorable tax situation could raise it in a particular case, and I'm not saying it's categorically not worth it, but others could say that's not so material given their overall goals, and considering risk.
I agree that if you are convinced that stocks will return 3% real over the next 30 years, then pulling money out of the stock market is not a big deal. I do not agree that 1/CAPE is a good predictor of real stock returns over 30 year periods.
There's room for debate about expected return from now, but assuming past return is pretty obviously optimistic, again especially an analysis where you borrow at today's low interest rates to finance a stock position. There's pretty obviously at least some connection between expensive stocks (high CAPE, low earnings yield), expensive bonds (low yield), expensive real estate, expensive pretty much every asset, and expected returns now being lower than historical average return across the board. The normal fallacy (it really is, frankly) of assuming that the past average stock return is the expected stock return now is magnified if you assume financing at historically low interest rates.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by HootingSloth »

JackoC wrote: Wed Oct 14, 2020 9:02 am
HootingSloth wrote: Wed Oct 14, 2020 8:48 am
JackoC wrote: Tue Oct 13, 2020 10:13 pm
HootingSloth wrote: Tue Oct 13, 2020 3:10 pm
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
That's kind of apples and oranges though, comparing low interest rates of now with past stock returns. Stock expected returns now are lower for many of the same reasons mortgage rates are lower. Stock real expected return may be estimated as 1/CAPE, now=~3%. Add back long term inflation, maybe 5% as a round number nominal expected total return for stocks. The 30 yr (18y avg life) mortgage rate is 2.96% APR average per Nerdwallet. Some people can fully deduct mortgages that size, though many effectively can't since the 2018 tax law. Plus w/ taxable account money to spend in retirement you can't really ignore capital gains tax though it's deferred, and basis step up for heirs is very far from guaranteed to last IMO. So the net effect of taxes could be limited. The pre-tax margin of ~2% on $370k for 18 yrs average is something like 10% of $1.2mil. A favorable tax situation could raise it in a particular case, and I'm not saying it's categorically not worth it, but others could say that's not so material given their overall goals, and considering risk.
I agree that if you are convinced that stocks will return 3% real over the next 30 years, then pulling money out of the stock market is not a big deal. I do not agree that 1/CAPE is a good predictor of real stock returns over 30 year periods.
There's room for debate about expected return from now, but assuming past return is pretty obviously optimistic, again especially an analysis where you borrow at today's low interest rates to finance a stock position. There's pretty obviously at least some connection between expensive stocks (high CAPE, low earnings yield), expensive bonds (low yield), expensive real estate, expensive pretty much every asset, and expected returns now being lower than historical average return across the board. The normal fallacy (it really is, frankly) of assuming that the past average stock return is the expected stock return now is magnified if you assume financing at historically low interest rates.
This is why my original post also quoted 10th and 90th percentile returns from Portfolio Visualizer. By the way, this is using the Monte Carlo calculator, not just actual historic sequences of returns, so those tails are much fatter than actual historical returns have been. And you should be especially suspicious of the Monte Carlo tails if you believe strongly in mean reversion and that valuations matter (which you appear to believe). From the perspective of someone who strongly believes that valuations matter, $150K could be seen as overly pessimistic because it assumes a sequence of successive bad years that is inconsistent with mean reversion.

Even taking this lower amount, $150K is still material me. Maybe it is not to some people. It is as if someone came to me with a lottery ticket and said "Unless something historically unprecedented happens, it will pay out over $150K; possibly as high as $1.2M or more. The only cost is that you have to have the psychological (but not the financial, since that is already taken into account in the payout distribution) burdens of holding a mortgage." That would seem like a very nice deal to me.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mak1277 »

HootingSloth wrote: Wed Oct 14, 2020 11:45 am
JackoC wrote: Wed Oct 14, 2020 9:02 am
HootingSloth wrote: Wed Oct 14, 2020 8:48 am
JackoC wrote: Tue Oct 13, 2020 10:13 pm
HootingSloth wrote: Tue Oct 13, 2020 3:10 pm
I do not quite understand this point, at least stated as a generally applicable principle. Surely, for some people, it can make quite a large difference. I have almost 30 years left on my ~$370k mortgage, but could pay it off today by pulling stocks from my taxable account. But Portfolio Visualizer tells me that--given historic median returns--pulling the stocks out now and then contributing the amount of my mortgage payment back each month would leave me with about $1.2M less in retirement ($150k with 10th percentile returns; $4.4M with 90th percentile returns). All of these amounts are in 2020 dollars. To me, these are material amounts.
That's kind of apples and oranges though, comparing low interest rates of now with past stock returns. Stock expected returns now are lower for many of the same reasons mortgage rates are lower. Stock real expected return may be estimated as 1/CAPE, now=~3%. Add back long term inflation, maybe 5% as a round number nominal expected total return for stocks. The 30 yr (18y avg life) mortgage rate is 2.96% APR average per Nerdwallet. Some people can fully deduct mortgages that size, though many effectively can't since the 2018 tax law. Plus w/ taxable account money to spend in retirement you can't really ignore capital gains tax though it's deferred, and basis step up for heirs is very far from guaranteed to last IMO. So the net effect of taxes could be limited. The pre-tax margin of ~2% on $370k for 18 yrs average is something like 10% of $1.2mil. A favorable tax situation could raise it in a particular case, and I'm not saying it's categorically not worth it, but others could say that's not so material given their overall goals, and considering risk.
I agree that if you are convinced that stocks will return 3% real over the next 30 years, then pulling money out of the stock market is not a big deal. I do not agree that 1/CAPE is a good predictor of real stock returns over 30 year periods.
There's room for debate about expected return from now, but assuming past return is pretty obviously optimistic, again especially an analysis where you borrow at today's low interest rates to finance a stock position. There's pretty obviously at least some connection between expensive stocks (high CAPE, low earnings yield), expensive bonds (low yield), expensive real estate, expensive pretty much every asset, and expected returns now being lower than historical average return across the board. The normal fallacy (it really is, frankly) of assuming that the past average stock return is the expected stock return now is magnified if you assume financing at historically low interest rates.
This is why my original post also quoted 10th and 90th percentile returns from Portfolio Visualizer. By the way, this is using the Monte Carlo calculator, not just actual historic sequences of returns, so those tails are much fatter than actual historical returns have been. And you should be especially suspicious of the Monte Carlo tails if you believe strongly in mean reversion and that valuations matter (which you appear to believe). From the perspective of someone who strongly believes that valuations matter, $150K could be seen as overly pessimistic because it assumes a sequence of successive bad years that is inconsistent with mean reversion.

Even taking this lower amount, $150K is still material me. Maybe it is not to some people. It is as if someone came to me with a lottery ticket and said "Unless something historically unprecedented happens, it will pay out over $150K; possibly as high as $1.2M or more. The only cost is that you have to have the psychological (but not the financial, since that is already taken into account in the payout distribution) burdens of holding a mortgage." That would seem like a very nice deal to me.
You're forgetting, though, that the first question was "are you already rich?". If the answer to that is "no" then the second question doesn't even apply.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by HootingSloth »

mak1277 wrote: Wed Oct 14, 2020 12:45 pm
HootingSloth wrote: Wed Oct 14, 2020 11:45 am
This is why my original post also quoted 10th and 90th percentile returns from Portfolio Visualizer. By the way, this is using the Monte Carlo calculator, not just actual historic sequences of returns, so those tails are much fatter than actual historical returns have been. And you should be especially suspicious of the Monte Carlo tails if you believe strongly in mean reversion and that valuations matter (which you appear to believe). From the perspective of someone who strongly believes that valuations matter, $150K could be seen as overly pessimistic because it assumes a sequence of successive bad years that is inconsistent with mean reversion.

Even taking this lower amount, $150K is still material me. Maybe it is not to some people. It is as if someone came to me with a lottery ticket and said "Unless something historically unprecedented happens, it will pay out over $150K; possibly as high as $1.2M or more. The only cost is that you have to have the psychological (but not the financial, since that is already taken into account in the payout distribution) burdens of holding a mortgage." That would seem like a very nice deal to me.
You're forgetting, though, that the first question was "are you already rich?". If the answer to that is "no" then the second question doesn't even apply.
mak1277, I recently joined the two comma club in my early 30s solely by saving excess salary into a traditional 3 fund portfolio while paying off over $300k in student loan debt at the same time. If JackoC's projected 3% real returns over the next 30 years comes to pass (or, of course, anything better), then I will meet WCI's criteria of being a 60-year-old multimillionaire (in 2020 dollars) even if I never save another penny. I will let you decide whether that meets the criteria for the first question.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by anon_investor »

Honestly, who pays 3% on a mortgage now a days? :twisted: :twisted: :twisted: Everyone should refinance and get a better rate!!!

I wonder how the discussion would shift is someone had a 2% mortgage???
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mak1277 »

HootingSloth wrote: Wed Oct 14, 2020 1:31 pm
mak1277 wrote: Wed Oct 14, 2020 12:45 pm
HootingSloth wrote: Wed Oct 14, 2020 11:45 am
This is why my original post also quoted 10th and 90th percentile returns from Portfolio Visualizer. By the way, this is using the Monte Carlo calculator, not just actual historic sequences of returns, so those tails are much fatter than actual historical returns have been. And you should be especially suspicious of the Monte Carlo tails if you believe strongly in mean reversion and that valuations matter (which you appear to believe). From the perspective of someone who strongly believes that valuations matter, $150K could be seen as overly pessimistic because it assumes a sequence of successive bad years that is inconsistent with mean reversion.

Even taking this lower amount, $150K is still material me. Maybe it is not to some people. It is as if someone came to me with a lottery ticket and said "Unless something historically unprecedented happens, it will pay out over $150K; possibly as high as $1.2M or more. The only cost is that you have to have the psychological (but not the financial, since that is already taken into account in the payout distribution) burdens of holding a mortgage." That would seem like a very nice deal to me.
You're forgetting, though, that the first question was "are you already rich?". If the answer to that is "no" then the second question doesn't even apply.
mak1277, I recently joined the two comma club in my early 30s solely by saving excess salary into a traditional 3 fund portfolio while paying off over $300k in student loan debt at the same time. If JackoC's projected 3% real returns over the next 30 years comes to pass (or, of course, anything better), then I will meet WCI's criteria of being a 60-year-old multimillionaire (in 2020 dollars) even if I never save another penny. I will let you decide whether that meets the criteria for the first question.
Personally, if I "only" had $1 million I would not strongly consider paying off a $300k+ mortgage. What may or may not happen in 30 years is not (to me) relevant to any of this discussion.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by investnoob »

Cycle wrote: Mon Oct 12, 2020 9:27 pm Hard to say anything about the future, but i paid off my 2.8% mortgage during the 2010s in my early 30s when that money would have been growing at 15% per year since.

That will end up equating to a year or so extra working at megacorp. not the end of the world, but notable.
I did a similar thing. But the townhouse I bought for $175K in 2006 would now cost me over $400k. I have four months left on the mortgage. So I'm not really sure what would leave me further ahead if I had just rented a small apartment and invested the difference. The difference in rent vs PITI would have maybe amounted to $600 a month for 15 years. I'd have to do the math I guess.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Freetime76 »

I guess I am a simple soul. Maybe that is an outlier in this particular thread, though.

I have no interest in debt. Neither does my spouse. Thank God. Neither of us is impressed with moving the pea around under the shell...so, no, I am not impressed with leveraged purchases At All. Including real estate, with the exception of your primary home if needed to get started.

I like buying something and never thinking about paying for it again.

I prefer to buy something and “feel” it, by paying actual dollars where our bank account balance goes down. It makes us get a better price, and often we decide we are a-okay just as we are. So that would be a zero dollar, zero interest purchase, eh?

We are free to focus on other goals with our full energy and attention. We don’t follow the market at all or care what it does. Like our horses, dogs, chickens, the beautiful fall weather, the giant cookie my DH just brought home as a surprise. It’s freeing. Can’t beat it. Would never go back.

Of the 50+ and older crowd we know of nobody who was unhappy they paid off their mortgage. I will never go crawling to a bank again.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by HootingSloth »

mak1277 wrote: Wed Oct 14, 2020 1:48 pm Personally, if I "only" had $1 million I would not strongly consider paying off a $300k+ mortgage.
On this we are in agreement. :sharebeer
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by emoore »

Freetime76 wrote: Wed Oct 14, 2020 3:28 pm
Of the 50+ and older crowd we know of nobody who was unhappy they paid off their mortgage. I will never go crawling to a bank again.
But would some be upset if you said that you could have either paid of your house or had an extra $1M in your retirement accounts? I think that matters to the question. I'm sure everyone will say they are happy they paid off their mortgage but that question doesn't take into account the alternative.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EddyB »

Freetime76 wrote: Wed Oct 14, 2020 3:28 pm I guess I am a simple soul. Maybe that is an outlier in this particular thread, though.

I have no interest in debt. Neither does my spouse. Thank God. Neither of us is impressed with moving the pea around under the shell...so, no, I am not impressed with leveraged purchases At All. Including real estate, with the exception of your primary home if needed to get started.

I like buying something and never thinking about paying for it again.

I prefer to buy something and “feel” it, by paying actual dollars where our bank account balance goes down. It makes us get a better price, and often we decide we are a-okay just as we are. So that would be a zero dollar, zero interest purchase, eh?

We are free to focus on other goals with our full energy and attention. We don’t follow the market at all or care what it does. Like our horses, dogs, chickens, the beautiful fall weather, the giant cookie my DH just brought home as a surprise. It’s freeing. Can’t beat it. Would never go back.

Of the 50+ and older crowd we know of nobody who was unhappy they paid off their mortgage. I will never go crawling to a bank again.
I don't know if simplicity makes you an outlier here, because I'm equally simple, but resulting in the opposite conclusion. If somebody wants to lend me money at a cost (after deductions) likely to be at or below the rate of inflation, with no personal recourse, I'll take it, and then not worry about it---it doesn't reduce my energy or attention for other matters. So that's freeing. And as it turns out, taking a 15-year mortgage at 2.75% (no points) in 2012 made me some money (as I expected), so it does indeed seem that it "beat" the alternative.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by rr2 »

I refinanced a house with a mortgage in the amount of $280 K almost 9 years ago. I had two choices -- either a 30 year at 3.5% or a 15 year at 2.875%. I took the 30 year at 3.5% and invested the difference every month in VTSAX.

After 9 years:
Mortgage balance = $225 K
Mortgage balance assuming 15 year FRM = $126 K
VTSAX balance (excl dividends/taxes) = $132 K

If I were to pay down the mortgage with the entire VTSAX balance, the mortgage remaining would be = $93 K

Thus I have an extra $33 K in 9 years. Maybe for WCI this is not a significant amount of money. But for us it is.

Yes, I am aware that this came with a risk. Also aware that I need to take taxes into account.

About to refinance again, this time down to 2.5% for a 30 year.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EnjoyIt »

emoore wrote: Wed Oct 14, 2020 5:00 pm
Freetime76 wrote: Wed Oct 14, 2020 3:28 pm
Of the 50+ and older crowd we know of nobody who was unhappy they paid off their mortgage. I will never go crawling to a bank again.
But would some be upset if you said that you could have either paid of your house or had an extra $1M in your retirement accounts? I think that matters to the question. I'm sure everyone will say they are happy they paid off their mortgage but that question doesn't take into account the alternative.
I agree with you completely, but the alternative requires discipline to invest. If instead of investing one spends even a fraction of that cash, then paying into the the mortgage would have worked out better.

Disclaimer: We did not pay off our mortgage until we hit 25x expenses.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

Independent George wrote: Wed Oct 14, 2020 12:06 am I have literally invested 100% of the savings each time.
Impressive. But rare I would venture.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBTX »

rr2 wrote: Wed Oct 14, 2020 5:53 pm I refinanced a house with a mortgage in the amount of $280 K almost 9 years ago. I had two choices -- either a 30 year at 3.5% or a 15 year at 2.875%. I took the 30 year at 3.5% and invested the difference every month in VTSAX.

After 9 years:
Mortgage balance = $225 K
Mortgage balance assuming 15 year FRM = $126 K
VTSAX balance (excl dividends/taxes) = $132 K

If I were to pay down the mortgage with the entire VTSAX balance, the mortgage remaining would be = $93 K

Thus I have an extra $33 K in 9 years. Maybe for WCI this is not a significant amount of money. But for us it is.

Yes, I am aware that this came with a risk. Also aware that I need to take taxes into account.

About to refinance again, this time down to 2.5% for a 30 year.
It would be an interesting calculation, and one loaded with assumptions, but I suspect over 20+ years the benefit is near or over just over 6 figures in our case. So no, that by itself didn't make us "rich", but the positive impact was certainly material.

Also, the core concept of the piece seems to be Dave Ramsey-ian, in that borrowing will likely be spent. And that is likely true for many or even most of those who are financially illiterate. But if that were true for everybody, then nobody would save anything, because given the choice of saving or spending they would save. Whether the money was borrowed or earned shouldn't make a difference as to whether they invest it or waste it on consumption. Bottom line, for those who have the discipline to save, low interest debt is a way to save / invest more.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by sergeant »

WCI, don't let the negative comments get to you. It's not worth the angst. Those that have followed you know the true story. Thanks for the job you do.
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

sergeant wrote: Wed Oct 14, 2020 6:19 pm WCI, don't let the negative comments get to you. It's not worth the angst. Those that have followed you know the true story. Thanks for the job you do.
Thanks for your kind words.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by anon_investor »

White Coat Investor wrote: Wed Oct 14, 2020 6:08 pm
Independent George wrote: Wed Oct 14, 2020 12:06 am I have literally invested 100% of the savings each time.
Impressive. But rare I would venture.
I think more will try this route after recent low rate refinances (sub 3%), there have been a few threads discussing it lately. I know I have been.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

JBTX wrote: Wed Oct 14, 2020 6:11 pm Whether the money was borrowed or earned shouldn't make a difference as to whether they invest it or waste it on consumption.
This is a really interesting concept I've spent a lot of time thinking about and will likely continue to think about in the future. In reality, since most of us have debt, most of us ARE borrowing to consume. Since the money is fungible. Maybe that's okay and maybe it isn't, but there is no doubt if more people realized this, more people would spend less and carry less debt because they wouldn't be comfortable with it.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EddyB »

White Coat Investor wrote: Wed Oct 14, 2020 6:22 pm
JBTX wrote: Wed Oct 14, 2020 6:11 pm Whether the money was borrowed or earned shouldn't make a difference as to whether they invest it or waste it on consumption.
This is a really interesting concept I've spent a lot of time thinking about and will likely continue to think about in the future. In reality, since most of us have debt, most of us ARE borrowing to consume. Since the money is fungible. Maybe that's okay and maybe it isn't, but there is no doubt if more people realized this, more people would spend less and carry less debt because they wouldn't be comfortable with it.
Presumably that also means most of us are borrowing to contribute to charity. Just an observation.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Rowan Oak »

sergeant wrote: Wed Oct 14, 2020 6:19 pm WCI, don't let the negative comments get to you. It's not worth the angst. Those that have followed you know the true story. Thanks for the job you do.
+1
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by L82GAME »

Rowan Oak wrote: Wed Oct 14, 2020 6:37 pm
sergeant wrote: Wed Oct 14, 2020 6:19 pm WCI, don't let the negative comments get to you. It's not worth the angst. Those that have followed you know the true story. Thanks for the job you do.
+1
+1!
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by 8foot7 »

White Coat Investor wrote: Wed Oct 14, 2020 6:07 pm
8foot7 wrote: Wed Oct 14, 2020 8:28 am
ScubaHogg wrote: Wed Oct 14, 2020 8:10 am If by “# 4 Can't Go Bankrupt Without Debt”, the author means “if you have no debt at the beginning of an emergency, you can’t go bankrupt” he is incorrect. Lose a job while having an expensive medical emergency can drive one into debt real fast, mortgage or no mortgage. Indeed, when the news refers to “medical bankruptcies”, once you dig in it’s often the income loss couple with all the other expenses of life that really drive the bankruptcies.
I generally agree with the thesis of the article, but this stuck out to me too - the guy getting rich of medical emergencies preaching about avoiding debt when sometimes that debt, for a broke person, is unavoidable.
Would you feel differently if you learned that guy has been donating more than he makes off of medical emergencies to charity every year for a number of years? Or that he was up until 3:30 this morning with a patient? Probably not I suspect.

I interviewed Larry Swedroe yesterday. Ad hominem comments like yours demonstrate well why he isn't here any more.

You would be more pleasant to be around if you had, like ScubaHogg, focused your anonymous comment on the idea rather than the person with the idea. His comment is valid. Yours is just mean. I don't expect an apology, even though it would be appropriate.
I am sorry that I caused you offense. You have posted multiple times on your site that you are rich. You are an emergency physician. I have seen ER bills. Your post said broke people can’t go bankrupt but that’s not true precisely because of medical emergencies. I was agreeing with someone who pointed out a flaw in your reasoning within your post. I am sure you do good work. I am not sure why your shift hours or charitable contributions or Larry Swedroe have anything to do with broke people being driven into bankruptcy due to medical debt. My post was about your post, which is the topic of this thread, and not you personally. But again, I am sorry to have offended you.
Last edited by 8foot7 on Wed Oct 14, 2020 6:51 pm, edited 1 time in total.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Rowan Oak »

White Coat Investor wrote: Wed Oct 14, 2020 6:22 pm
JBTX wrote: Wed Oct 14, 2020 6:11 pm Whether the money was borrowed or earned shouldn't make a difference as to whether they invest it or waste it on consumption.
This is a really interesting concept I've spent a lot of time thinking about and will likely continue to think about in the future. In reality, since most of us have debt, most of us ARE borrowing to consume. Since the money is fungible. Maybe that's okay and maybe it isn't, but there is no doubt if more people realized this, more people would spend less and carry less debt because they wouldn't be comfortable with it.
This resonates with me. The moment I understood that having a mortgage was the same as borrowing the money to invest I wasn't comfortable with it and had to eliminate the debt as soon as possible. This was years ago and the decision was the right one for me.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBTX »

White Coat Investor wrote: Wed Oct 14, 2020 6:22 pm
JBTX wrote: Wed Oct 14, 2020 6:11 pm Whether the money was borrowed or earned shouldn't make a difference as to whether they invest it or waste it on consumption.
This is a really interesting concept I've spent a lot of time thinking about and will likely continue to think about in the future. In reality, since most of us have debt, most of us ARE borrowing to consume. Since the money is fungible. Maybe that's okay and maybe it isn't, but there is no doubt if more people realized this, more people would spend less and carry less debt because they wouldn't be comfortable with it.
Again it depends on the targrt audience. It is the same argument Dave Ramsey makes. We just can't be trusted to control ourselves. And it is true about a great many people as evidenced by the ranks of the paycheck to paycheck crowd, which isn't limited to the lower income class.

But in a forum such as this, where we are talking about saving and investing strategy, the presumption before you can accomplish anything you have to have the discipline to implement your goals (IPS, etc). Given that, I don't understand why it is different with low interest debt. Why is the presumption that individuals will be irresponsible with those funds, yet otherwise responsible for all other savings and investing?

I think back 20+ years when we bought our first house, with a modest mortgage. Even though we both worked with good incomes, we borrowed up to 90%, which included a home equity loan component. It also turns out that year I was able to roll a 401k into a ira, then convert to a Roth when the market was at a interim low point - DOW briefly around 8000 I think. Long term that has been a good move for us. There is no way that could happened if we put most of our liquid savings into mortgage payoff. Luckily a couple of years later we were able to pay the HELOC piece off.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by WS1 »

firebirdparts wrote: Tue Oct 13, 2020 7:27 am
mesaverde wrote: Tue Oct 13, 2020 6:08 am I'm a public school teacher and have refinanced/extended my ~55% LTV 30 year fixed mortgage back out to 360 months several times.
Currently it's at 3%. If I can do a no cost refinance to 2.5% in the next year or so I won't hesitate.
The mortgage is the only debt I carry. I could choose to pay this debt off with extra principal payments but it would be incredibly stupid in my situation.

By not paying that mortgage down I'm able to contribute $45,000/year to a gov. 457b and 430b with Fidelity and Trad. IRA with Vanguard, which takes me me from the top end of the 22% federal income tax bracket to the top end of the 12% bracket. In effect a GUARANTEED 10% return on that portion of my income, with any investment returns from stocks and bonds icing on the cake. I'll remain in the 12% bracket (or its equivalent) in retirement.
Well, okay, but if you were a medical doctor making $300,000 a year, you might do differently. That's who he's talking to.
Under appreciated point
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by crystalbank »

I have to say that this is a very well written article. I think we tend to rationalize our debt somehow (it's only 2.5%!!) and always carry it forward. Just having a credit card leads to more spending (I remember there was a study about this) because you don't have to pay up right in that moment and can deal with it later.

Yes, I know you can utilize debt (especially a mortgage) to increase your returns down the line due to the fact that stocks have historically compounded better over the long run. But for me personally, having a mortgage did inflate my lifestyle significantly. We did buy a bigger house just because the numbers worked out, took fancy vacations and drove german cars. I think having a 'low' interest mortgage definitely helped to rationalize the additional spending. We did max out our retirement accounts as well, but if I had to do over again I would just rent until I can afford to pay the house I need with cash.

Right now, we still have a low interest mortgage (just refi'ed last year) but lately I'm pondering if it makes much sense to keep it. With the market crash in March I have enough TLH to offset any capital gains in taxable and get rid of the mortgage.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

8foot7 wrote: Wed Oct 14, 2020 6:47 pm
White Coat Investor wrote: Wed Oct 14, 2020 6:07 pm
8foot7 wrote: Wed Oct 14, 2020 8:28 am
ScubaHogg wrote: Wed Oct 14, 2020 8:10 am If by “# 4 Can't Go Bankrupt Without Debt”, the author means “if you have no debt at the beginning of an emergency, you can’t go bankrupt” he is incorrect. Lose a job while having an expensive medical emergency can drive one into debt real fast, mortgage or no mortgage. Indeed, when the news refers to “medical bankruptcies”, once you dig in it’s often the income loss couple with all the other expenses of life that really drive the bankruptcies.
I generally agree with the thesis of the article, but this stuck out to me too - the guy getting rich of medical emergencies preaching about avoiding debt when sometimes that debt, for a broke person, is unavoidable.
Would you feel differently if you learned that guy has been donating more than he makes off of medical emergencies to charity every year for a number of years? Or that he was up until 3:30 this morning with a patient? Probably not I suspect.

I interviewed Larry Swedroe yesterday. Ad hominem comments like yours demonstrate well why he isn't here any more.

You would be more pleasant to be around if you had, like ScubaHogg, focused your anonymous comment on the idea rather than the person with the idea. His comment is valid. Yours is just mean. I don't expect an apology, even though it would be appropriate.
I am sorry that I caused you offense. You have posted multiple times on your site that you are rich. You are an emergency physician. I have seen ER bills. Your post said broke people can’t go bankrupt but that’s not true precisely because of medical emergencies. I was agreeing with someone who pointed out a flaw in your reasoning within your post. I am sure you do good work. I am not sure why your shift hours or charitable contributions or Larry Swedroe have anything to do with broke people being driven into bankruptcy due to medical debt. My post was about your post, which is the topic of this thread, and not you personally. But again, I am sorry to have offended you.
I'm not surprised you jumped to that conclusion. My first million did come from practicing medicine and saving what I earned and investing it in index funds. I am also now more wealthy than I ever expected to be. But those two facts aren't as connected as you would guess due to other fortunate events in my life.

I agree with your point that broke people can't go bankrupt UNTIL they borrow money from someone. And illnesses and injuries (whether emergent or not), especially for people without health, disability, and life insurance, often lead to borrowing money and bankruptcy.

And frankly, I've considered retiring from medicine just because it is so embarrassing to be part of our health care system. It would be much more convenient to be able to criticize it from the outside. But don't assume because everyone has seen a $5K ER bill that $5K ER bills are the cause of our health care system being so expensive. Emergency care is actually just 2% of the health care dollar, believe it or not, even with all those $5K ER bills. By contrast hospital care is 33%, physicians and clinics is 20%, and drugs is 10%.

https://www.acepnow.com/article/numbers ... alth-care/

Shoot, dental care costs more than emergency care.

https://www.fightcancer.org/policy-reso ... -are-spent

Anyone who thinks solving the very real healthcare problem is easy doesn't understand the problem.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6139801/
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by mmmodem »

Great article and thank you White Coat Investor. This is my reply to the post's 2 questions and 14 reasons. If I wasn't able to answer these points, perhaps I am looking at debt the wrong way.

1. No, I am not rich
2. I don't know why I shouldn't answer the second question just because I am not rich. I was 35 years old when I took on more debt to buy a second home when I could've used it to pay off some of my first home. This made a not insignificant double digit percentage increase to my net worth when I sold it a couple of years ago.

Now onto the Reasons:
#1 Justification
It's math. Math says investing is better financially and holding a low interest mortgage than paying off the home.
#2 You are ignoring risk
I am accepting risk.
#3 People don't understand how taxes and debt interact
I don't claim to know anything about taxes. I don't have an emergency fund earning low interest. I do have an emergency plan should I no longer be able to work.
#4 Can't go bankrupt without debt
I can't go bankrupt if I can pay off my debt.
#5 You carry too much cash
I do not. I carry enough to pay off my monthly credit card.
#6 Less disability and life insurance
Our life insurance costs considerably less than the amount investing gains. Will be dropping it soon before the home is paid off because taxable investments will have eclipsed the debt.
#7 Use a more aggressive asset allocation
It has the opposite effect on me. The debt allows me to be more aggressive because my home isn't as large a portion of my net worth.
#8 Take more risks at work
I look at my net worth as assets - debt. Whether I have mortgage or own my home, my net worth is the same. The amount of risk I take at work will be the same.
#9 Take more risks with a side business
This is the same reason as #8 so it's really only 13 reasons.
#10 Simplify Simplify Simplify
I would buy a garbage disposal at 2% if they let me finance for 30 years. According to the article. That is what I am doing. I don't draw the line anywhere. If someone is wiling to let me borrow money at a low interest, I will take it. A home loan and car loan are the only two things I added to my life. Both are paid automatically from an account that is replenished by my paycheck. Making that much money for doing so little is simple.
#11 You have to care about the numbers that don't matter
"Watch the pennies and the dollars will take care of themselves"
#12 The spiritual argument
God calls on us to be good stewards of His riches. I believe I am doing just that.
#13 Liquidity is overrated
Maybe when you have a lot of it? For someone who doesn't have a lot of liquidity, this feels better than a paid off home.
#14 Multi -Millionaires Don't do this
I really have no idea on this one as I do not know a lot of multi-millionaires. I only know a handful of multi-millionaires personally. The richest people I know all have home mortgages and can pay it off but choose to invest instead. I've heard many times that rich people don't buy things. They invest in things that generate enough cash to buy the things they want.
Independent George
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Independent George »

White Coat Investor wrote: Wed Oct 14, 2020 6:08 pm
Independent George wrote: Wed Oct 14, 2020 12:06 am I have literally invested 100% of the savings each time.
Impressive. But rare I would venture.
Exceedingly rare. Each time I refinanced, I knew of several coworkers undergoing the same process, and we compared notes. Even after explaining exactly what I was doing and why, only one other person (out of eight or nine) did the same thing. I know for certain that two people did cash-out refinances (because they boasted about it!), and I believe most of the others rolled the fees into the new balance instead of paying cash. I never asked, but in retrospect I wonder how many of them would have even had the cash to front the refinance fees if they wanted to. Bear in mind, I work in public accounting, and the calculations and analysis I did were not far from the kind of thing we do for a living.

I'm not sure if there's correlation there, but the lone coworker who did the same as I was also a working-class first-generation American. We didn't compare notes until afterwards, but he did his own calculations independently, and it turned out we followed pretty much the exact same plan.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by tipswatcher »

I really, really, really think debt is a "personal" decision. There are advantages to no debt, and there are advantages to wisely crafted debt.

I am on the "no debt" team and my wife and I haven't had any debt for 20 years. None. Credit cards are paid off every month. No mortgage, no car debt. It might not have been the wisest path in times of "ZERO PERCENT FINANCING" but we don't care and don't bother. We don't want debt. It is a matter of personal comfort and what makes you happy.
TIPS: Perfect investment for imperfect times?
finite_difference
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by finite_difference »

willthrill81 wrote: Tue Oct 13, 2020 10:44 am
finite_difference wrote: Tue Oct 13, 2020 10:29 am So I shouldn’t go skiing because I have a 30-year mortgage.

If I lived like that, I could probably pay off my mortgage in 10 years instead of 30.

I’d rather hit the slopes.

Balance in all things.
I hit the slopes many times when we had a mortgage. It's just important to recognize that when you have debt, you're leveraging the rest of your money.
My mortgage rate is 2.875%. The home value is tracking inflation at about 2.2%. It balances out?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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willthrill81
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by willthrill81 »

finite_difference wrote: Wed Oct 14, 2020 8:18 pm
willthrill81 wrote: Tue Oct 13, 2020 10:44 am
finite_difference wrote: Tue Oct 13, 2020 10:29 am So I shouldn’t go skiing because I have a 30-year mortgage.

If I lived like that, I could probably pay off my mortgage in 10 years instead of 30.

I’d rather hit the slopes.

Balance in all things.
I hit the slopes many times when we had a mortgage. It's just important to recognize that when you have debt, you're leveraging the rest of your money.
My mortgage rate is 2.875%. The home value is tracking inflation at about 2.2%. It balances out?
You're still using leverage, by definition. It's just inexpensive, non-callable leverage.
Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.
https://www.investopedia.com/terms/l/leverage.asp

Further, many here would be beating down a bank's doors if it offered them a guaranteed 2.875%, probably post-tax, return, which is what you get by paying down such a mortgage.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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