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

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

Post by dharrythomas »

Jim,

Love this blog post. Sending it to a relative.

I have no regrets paying off our mortgage early. Debt free is the way to live.
novemberrain
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by novemberrain »

JackoC wrote: Fri Oct 16, 2020 4:47 pm Looking forward from when I started making good money in my 30's, my concerns were long term security of income and investment returns, in view of a young family (I didn't make enough to consider at all expensive cars before I had a family). The fact that family and financial security worked out happily is the headline, being too frugal with cars is a footnote.
I can relate. I didn't splurge on anything in my 20s either. I too was worried about long term security and family etc. But once I reached mid to late 30s and income went up quite a bit, I am starting to spend on fun non-boglehead-approved things and experiences.

Based on my current trajectory, that will mean the difference between 5m vs 10m at retirement.
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Kaktus »

It is a big issue for sure; Should I spend now or in 20 years. Personally I dont think that article hits home. I dont expect anyone who is not already super frugal to read it and shout to his family "right!, no skiing until the motgage is paid of in 30 years!" Besides not bery realistic it is not the best guide either. Your debt is not the only number that is important. Zero debt, zero savings and zero skiing experience, that would be a terrible place to be at your 60th birthday.
EnjoyIt
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EnjoyIt »

Toons wrote: Fri Oct 16, 2020 10:30 am Debt Free=
"Options"

:mrgreen:
One has far more options with invested assets compared to being debt free compare:

$350k house with no mortgage and $100k invested
Vs
$350k house with $300k mortgage and $400k invested.

Much more options having invested assets.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
CycloRista
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by CycloRista »

Dude2 wrote: Tue Oct 13, 2020 5:56 am
JonnyDVM wrote: Mon Oct 12, 2020 8:43 pm Scoffing at 3% deductible mortgage debt is extreme.
I would be uncomfortable to see a person light up a cigar with $100 bill. The median price of a home in the US is $329,000. At the start (assuming 20% down), we will be burning nearly $8000.
Another factor most do not consider is inflation. In my case, I purchased a home in the early 2000's and have had the good fortune of it appreciating in value along the way. Even with appreciation when inflation is factored in, I am essentially breaking even if I sold it today.

Side note: median home prices are the tip of the iceberg- try moving somewhere like Austin, TX, Bozeman, MT and elsewhere in the US where there is essentially hyperinflation due to interlopers turbo boosting housing market demand. This phenomena is on the rise in other areas too as more people are moving out of major cities seeking more living space (to continue working from home) and open/less congested areas outdoors due to the pandemic.

Risk of owning a principal residence is actually higher than one might imagine in terms of when you step on the merry go round and when you sell to move elsewhere. Not far from where I live, some homeowners are still under water on their home purchases prior to the Great Recession. They were in the unfortunate situation of purchasing a home at the height of the market. I'd have a difficult time continuing to pay down a mortgage on a short sale and know of more than a few who are in that situation (in a major suburban metropolitan area).

I've serendipitously manged buy and sell homes at favorable times and have avoided debt other than the mortgage on my primary residence. While I don't light cigars with Ben Franklin's, I do spend some and consider carrying sub 3% debt "good enough" as we cannot take our winnings with us.
pennywise
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by pennywise »

JBTX wrote: Wed Oct 14, 2020 10:28 pm
What really mattered?

1. Making more
2. Spending less
3. Owning my job(s)
4. Staying the course with a reasonable financial plan

The rest is noise. Yes, leveraging the mortgage can make a big difference, but not as big a difference as taking out half the mortgage in the first place.
While this point is valid, it is more valid to MDs (which your article was obviously directed towards) than other professions.
[/quote]


I disagree; WCI's points are equally valid across most people's financial lives.

We're not doctors, we were college administrators who bought what we could afford as young parents then stayed in a quite adequate house for 30 years while watching many friends do the move on/move up cycle into much larger and more luxurious places with larger and more burdensome debt loads.

And because we bought modestly and paid off the house in a few years we were able to cash flow excellent educations for our kids then, after they were grown and flown, we were able to retire on our terms debt free. We steadily put part of our paychecks into retirement funds too, made easier since we had no mortgage to siphon off that monthly contribution.

Even better, that modest paid off home appreciated enough that we sold it and used the profits-all of which went into our pocket since we owed nothing-to trade up to a waterfront, large, luxurious home in a resort paradise that makes us happy every day. Makes us even happier knowing we own this place with no mortgage either. Plus those retirement accounts compounded over the years into a very secure nest egg, again thanks to being able to keep funneling in the money we were NOT using for debt service.

White Coat Investor said it all and he said it well. It's the big things that get you where you want to be in life and being debt free is the biggest of all.
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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 »

pennywise wrote: Sat Oct 17, 2020 6:52 am I disagree; WCI's points are equally valid across most people's financial lives.

We're not doctors, we were college administrators who bought what we could afford as young parents then stayed in a quite adequate house for 30 years while watching many friends do the move on/move up cycle into much larger and more luxurious places with larger and more burdensome debt loads.
I think it's important to separate two things:

1. how much you spend on a house, and
2. whether you pay off the mortgage before investing

The two may be related--i.e. those planning to aggressively pay off the mortgage might be less tempted by a more expensive house. That seems to have been the driver of the difference between your experience and those of your friends who traded up to more expensive houses.

But if a person early in their career has

1. the self-discipline to not buy too much house, and
2. the self-discipline to save and invest in stocks

then they would usually be better off keeping the mortgage while investing in stocks. The opportunity cost of paying down the mortgage is not being able to spread out stock risk into the early part of your career. In low cost areas of the country, that may not be as big an issue. But in a city with high home prices, where even a modest house can cost more than a decade to pay off on a normal salary, I doubt it's a good idea to delay stock investing for that long.

Moving from a 30 year mortgage to a 15 year mortgage can still make sense due to the lower interest rate. But it's important to consider the opportunity cost of concentrated stock risk.
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Toons
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by Toons »

EnjoyIt wrote: Sat Oct 17, 2020 2:11 am
Toons wrote: Fri Oct 16, 2020 10:30 am Debt Free=
"Options"

:mrgreen:
One has far more options with invested assets compared to being debt free compare:

$350k house with no mortgage and $100k invested
Vs
$350k house with $300k mortgage and $400k invested.

Much more options having invested assets.
Appreciate the insight.
I was speaking from personal experience.
Paid off the mortgage 15 years ago,
Immediately started investing the "hypothetical" payment in Vanguard funds monthly.
Eventually debt free.
We chose the "option"
To Retire Early.
Now we have "options" to do with our time, (which is limited for all)
To Do What We Choose.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
EnjoyIt
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by EnjoyIt »

Toons wrote: Sat Oct 17, 2020 2:37 pm
EnjoyIt wrote: Sat Oct 17, 2020 2:11 am
Toons wrote: Fri Oct 16, 2020 10:30 am Debt Free=
"Options"

:mrgreen:
One has far more options with invested assets compared to being debt free compare:

$350k house with no mortgage and $100k invested
Vs
$350k house with $300k mortgage and $400k invested.

Much more options having invested assets.
Appreciate the insight.
I was speaking from personal experience.
Paid off the mortgage 15 years ago,
Immediately started investing the "hypothetical" payment in Vanguard funds monthly.
Eventually debt free.
We chose the "option"
To Retire Early.
Now we have "options" to do with our time, (which is limited for all)
To Do What We Choose.
:happy
That’s funny, I was speaking from personal experience also. We kept the mortgage and the low interest rate school debt. Invested the rest and now in our mid 40s are financially independent. We decided to both go part time as we both still enjoy work. Once hitting financial independence we quickly killed the mortgage. We now have the option to do whatever we want with our time.

If we paid off the mortgage first and not invested we would have missed out on some of those amazing gains after the financial crisis. We would probably still be full time employees today getting close to being financially independent but not there yet.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
GreenLawn
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by GreenLawn »

EnjoyIt wrote: Sat Oct 17, 2020 3:22 pm
Toons wrote: Sat Oct 17, 2020 2:37 pm
EnjoyIt wrote: Sat Oct 17, 2020 2:11 am
Toons wrote: Fri Oct 16, 2020 10:30 am Debt Free=
"Options"

:mrgreen:
One has far more options with invested assets compared to being debt free compare:

$350k house with no mortgage and $100k invested
Vs
$350k house with $300k mortgage and $400k invested.

Much more options having invested assets.
Appreciate the insight.
I was speaking from personal experience.
Paid off the mortgage 15 years ago,
Immediately started investing the "hypothetical" payment in Vanguard funds monthly.
Eventually debt free.
We chose the "option"
To Retire Early.
Now we have "options" to do with our time, (which is limited for all)
To Do What We Choose.
:happy
That’s funny, I was speaking from personal experience also. We kept the mortgage and the low interest rate school debt. Invested the rest and now in our mid 40s are financially independent. We decided to both go part time as we both still enjoy work. Once hitting financial independence we quickly killed the mortgage. We now have the option to do whatever we want with our time.

If we paid off the mortgage first and not invested we would have missed out on some of those amazing gains after the financial crisis. We would probably still be full time employees today getting close to being financially independent but not there yet.
Agree with this. Mortgages are really cheap now, great historical opportunity to expand one's options. Even more so with the internet providing exposure to a wide variety of lifestyles and pursuits on which to put cheap money to good use. Safe to say I don't agree with the OP on paying off a mortgage, though I understand why some folks prioritize living a debt free life.
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White Coat Investor
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

emoore wrote: Thu Oct 15, 2020 11:27 am
White Coat Investor wrote: Thu Oct 15, 2020 12:37 am
JBTX wrote: Wed Oct 14, 2020 10:28 pm I'm in my late 50s and am guessing 1/2 to 2/3 of networth is investment earnings.
How would that be. Maybe someday. I remember that 80% of my first million was just carved out of earnings. Pure brute force savings. Now looking at my spreadsheet it appears that of the money I have designated for retirement is still about 75% just money saved. Investment return really hasn't contributed all that much for me yet as a percentage. But that's a good problem to have, can't complain. As you noted, it's more a reflection of income than anything. But when that income hits prepared hands...watch out! The wealth builds very quickly. Now the earning/saving/investing stuff is relatively trivial and we find ourselves focused heavily on giving, estate planning, asset protection, legacy building, not ruining our kids etc. Never expected giving well to be more complicated than investing well, but such is life.
That's interesting. I just looked at my 401k contributions (including employer match) and my contributions account for less that half of my balance. I'm 43 and have been contributing for 18 years. And I don't have close to a million yet. so I'm not sure how your first million was 80% contributions? Very conservative asset allocation?
I still haven't been investing for 18 years and my income has been rising the whole time. When income flattens or decreases, then the earnings start making up more of balance. Imagine becoming a millionaire over 5 years versus over 25. Which investor's million will be made up more of earnings? The second of course, more time for compound interest to work.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

JBEB wrote: Thu Oct 15, 2020 4:28 pm I really enjoyed this thread and some of the articles posted. I found them very incitement and informative.

The two things I wonder about is how long term buy and hold real estate fits into these conversations (and not just a primary)

The other thing that I found intriguing was the 15-35% of debt is where you should be. If you are investing some of that in real estate, that number seems low. Even pretty conservative REI would be well over that number.
If all your net worth were in investment real estate that would be the case. But most people own a home, some 401(k)s, some cash, perhaps some taxable mutual funds etc. Thus even if your investment real estate has a LTV of 60% on average, you could still be down there in the recommended 25% range.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

finite_difference wrote: Fri Oct 16, 2020 11:08 am
White Coat Investor wrote: Wed Oct 14, 2020 9:27 pm Making little tweaks to my asset allocation didn't make a difference.

What really mattered?

0a. Born in America
0b. No major health problems

1. Making more
2. Spending less
3. Owning my jobs Highly successful doctor and financial guru
4. Staying the course with a reasonable financial plan

The rest is noise. Yes, leveraging the mortgage can make a big difference, but not as big a difference as taking out half the mortgage in the first place.
Added a couple things you forgot, channeling Bogle.

An anecdote: one of my doctors liked to discuss investments and stock tips. I told him to Google “White Coat Investor”. He carefully wrote it down on his pad and showed it to me. Several months later I called to make another appointment, and was informed he had retired. :D
Sorry about both things!
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by White Coat Investor »

Kaktus wrote: Sat Oct 17, 2020 1:26 am It is a big issue for sure; Should I spend now or in 20 years. Personally I dont think that article hits home. I dont expect anyone who is not already super frugal to read it and shout to his family "right!, no skiing until the motgage is paid of in 30 years!" Besides not bery realistic it is not the best guide either. Your debt is not the only number that is important. Zero debt, zero savings and zero skiing experience, that would be a terrible place to be at your 60th birthday.
To be fair, that isn't what the article said.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Re: The Wrong Way to Think About Debt - The White Coat Investor

Post by JBEB »

White Coat Investor wrote: Sat Oct 17, 2020 10:20 pm
JBEB wrote: Thu Oct 15, 2020 4:28 pm I really enjoyed this thread and some of the articles posted. I found them very incitement and informative.

The two things I wonder about is how long term buy and hold real estate fits into these conversations (and not just a primary)

The other thing that I found intriguing was the 15-35% of debt is where you should be. If you are investing some of that in real estate, that number seems low. Even pretty conservative REI would be well over that number.
If all your net worth were in investment real estate that would be the case. But most people own a home, some 401(k)s, some cash, perhaps some taxable mutual funds etc. Thus even if your investment real estate has a LTV of 60% on average, you could still be down there in the recommended 25% range.
makes sense. thanks
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