The Wrong Way to Think About Debt - The White Coat Investor
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Re: The Wrong Way to Think About Debt - The White Coat Investor
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.
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.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Last edited by novemberrain on Wed Aug 18, 2021 10:52 am, edited 1 time in total.
Re: The Wrong Way to Think About Debt - The White Coat Investor
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.
Re: The Wrong Way to Think About Debt - The White Coat Investor
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.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
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.
Re: The Wrong Way to Think About Debt - The White Coat Investor
While this point is valid, it is more valid to MDs (which your article was obviously directed towards) than other professions.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.
[/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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Re: The Wrong Way to Think About Debt - The White Coat Investor
I think it's important to separate two things: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.
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.
Total Portfolio Allocation and Withdrawal (TPAW)
Re: The Wrong Way to Think About Debt - The White Coat Investor
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.
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: The Wrong Way to Think About Debt - The White Coat Investor
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.Toons wrote: ↑Sat Oct 17, 2020 2:37 pmAppreciate 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.
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: |
viewtopic.php?p=1139732#p1139732
Re: The Wrong Way to Think About Debt - The White Coat Investor
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.EnjoyIt wrote: ↑Sat Oct 17, 2020 3:22 pmThat’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.Toons wrote: ↑Sat Oct 17, 2020 2:37 pmAppreciate 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.
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.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
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.emoore wrote: ↑Thu Oct 15, 2020 11:27 amThat'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?White Coat Investor wrote: ↑Thu Oct 15, 2020 12:37 amHow 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.
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
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.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.
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
Sorry about both things!finite_difference wrote: ↑Fri Oct 16, 2020 11:08 amAdded a couple things you forgot, channeling Bogle.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.
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.
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
To be fair, that isn't what the article said.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.
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
Re: The Wrong Way to Think About Debt - The White Coat Investor
makes sense. thanksWhite Coat Investor wrote: ↑Sat Oct 17, 2020 10:20 pmIf 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.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.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Looks like there is more than one way to get to FI.EnjoyIt wrote: ↑Sat Oct 17, 2020 3:22 pmThat’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.Toons wrote: ↑Sat Oct 17, 2020 2:37 pmAppreciate 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.
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.
Re: The Wrong Way to Think About Debt - The White Coat Investor
Absolutely, depending on market results, some pathways are faster than others. A good example would have been if I stayed at 100% equities the entire time as well. Instead I had some bonds which delayed financial independence by a year or so. If only hindsight could be monetized.Frugalbear wrote: ↑Sat Oct 24, 2020 11:12 pmLooks like there is more than one way to get to FI.EnjoyIt wrote: ↑Sat Oct 17, 2020 3:22 pmThat’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.Toons wrote: ↑Sat Oct 17, 2020 2:37 pmAppreciate 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.
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: |
viewtopic.php?p=1139732#p1139732
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Re: The Wrong Way to Think About Debt - The White Coat Investor
And people like me who don’t get any lasting pleasure from consumerism, or don’t view working as “wasting their entire lives”, can’t relate to your viewStarfish wrote: ↑Mon Oct 12, 2020 7:50 pm I personally cannot relate at all to the article. It addresses only a category of people, the ones with an uncontrollable spending issue. I personally don't know closely any of those people so I cannot relate.
Yes, buying a ski ticket while having a mortgage is like borrowing money for skiing. That is the point! Disregarding the value of time and youth it's a very big mistake. Even bigger than not saving enough for retirement! Of course I want to ski while I enjoy it, not in my 70s when I am financially secure. If it costs 3% a year, so be it.
I know people who have a lot of money but they did not do much except working until late in their 40s. They started to spend money recently. Regardless of how much they spend now they will never enjoy it as much as the would have in their 20s. In my opinion this is a fundamental mistake in how they lived their lives. It's the old stereotype about Americans and Japanese who travel the world in their 60s, 70s, 80s (or buying or Porsche or whatever) after wasting their entire lives working. It's too late. They should have done that in their 20s, 30s, 40s.
Re: The Wrong Way to Think About Debt - The White Coat Investor
+1Freetime76 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.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
My person story is slightly different.
Got out of school and got married. DW and I were renting for several years and put extra money into investments.
We then got stable jobs and bought a house. At this point we stopped investing and rapidly paid down our mortgage. Five years later we bought a newer house. Within three years of our second house, we paid off the mortgage and became debt free. At that point we started investing again.
Now... In theory we should have kept those two mortgages going and invested the whole time.
In practice, THANK GOD WE STOPPED INVESTING! The first round of investing (before we bought our first house), I chose some individual stocks (which definitely were doing poorer than the market) and used a Wealth Management advisor (who was putting me in high ER investments that were doing poorer than the market). He actually took over my Roth IRA and lost money in it over the ~eight years he managed it for me.
By the time we finished paying off our mortgage and started investing again ... I was several years older, had time to read a little about investing, and discovered this website. I was more mature and bought investments with an underlying strategy that was reflected in my Investment Policy Statement.
So, at least for me, paying off my mortgages gave me time to mature and understand investing, so I wouldn't make as big mistakes in aggregate.
Got out of school and got married. DW and I were renting for several years and put extra money into investments.
We then got stable jobs and bought a house. At this point we stopped investing and rapidly paid down our mortgage. Five years later we bought a newer house. Within three years of our second house, we paid off the mortgage and became debt free. At that point we started investing again.
Now... In theory we should have kept those two mortgages going and invested the whole time.
In practice, THANK GOD WE STOPPED INVESTING! The first round of investing (before we bought our first house), I chose some individual stocks (which definitely were doing poorer than the market) and used a Wealth Management advisor (who was putting me in high ER investments that were doing poorer than the market). He actually took over my Roth IRA and lost money in it over the ~eight years he managed it for me.
By the time we finished paying off our mortgage and started investing again ... I was several years older, had time to read a little about investing, and discovered this website. I was more mature and bought investments with an underlying strategy that was reflected in my Investment Policy Statement.
So, at least for me, paying off my mortgages gave me time to mature and understand investing, so I wouldn't make as big mistakes in aggregate.
Re: The Wrong Way to Think About Debt - The White Coat Investor
This.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 do use cash back credit cards to pay for things, but balance always paid in full each month.
No debt/loans.
No mortgage (paid off a few of them over the years).
Peace of mind.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger
Re: The Wrong Way to Think About Debt - The White Coat Investor
makingmistakes wrote: ↑Sun Oct 25, 2020 7:01 amAnd people like me who don’t get any lasting pleasure from consumerism, or don’t view working as “wasting their entire lives”, can’t relate to your viewStarfish wrote: ↑Mon Oct 12, 2020 7:50 pm I personally cannot relate at all to the article. It addresses only a category of people, the ones with an uncontrollable spending issue. I personally don't know closely any of those people so I cannot relate.
Yes, buying a ski ticket while having a mortgage is like borrowing money for skiing. That is the point! Disregarding the value of time and youth it's a very big mistake. Even bigger than not saving enough for retirement! Of course I want to ski while I enjoy it, not in my 70s when I am financially secure. If it costs 3% a year, so be it.
I know people who have a lot of money but they did not do much except working until late in their 40s. They started to spend money recently. Regardless of how much they spend now they will never enjoy it as much as the would have in their 20s. In my opinion this is a fundamental mistake in how they lived their lives. It's the old stereotype about Americans and Japanese who travel the world in their 60s, 70s, 80s (or buying or Porsche or whatever) after wasting their entire lives working. It's too late. They should have done that in their 20s, 30s, 40s.
Enjoying life has absolutely nothing to do with consumerism. You need money to enjoy life even at the minimum material satisfaction. At least because you need time off from work.
That being said, I find hard to understand the line some people draw between things that can bring experiences and the experiences themselves. It's the same thing.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
It can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
The Sensible Steward
Re: The Wrong Way to Think About Debt - The White Coat Investor
This is not a problem for somebody who enjoys those experiences. I rank priorities in terms of happiness obtained per $ spent.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
For some people a sports car can be a better investment than other experiences, like traveling for example. Especially a cheap one like a used Miata.
A pair of good skis and ski pass are good investment (as in $ spend per pleasure obtained) for somebody who enjoys skiing.
An expensive bicycle is good investment for somebody who enjoys it and puts a lot of miles on it.
A boat, motorcycle, ATV, RV etc could be very good and worthwhile investments.
The perceived problem is when people do not extract enjoyment from their purchases. This is very relevant for the buyer but is irrelevant from a consumerist perspective. The nature or the society does not care if I enjoy my RV or boat once I bought it.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Mmany academic studies have found that physical goods have a strong tendency to produce less happiness than intangible experiences. It's clearly not universal and potentially confounded by items such as those you mentioned, but the tendency is still significant. People appear to believe that physical goods will produce lasting happiness, but with relatively few exceptions, they appear to fail to do so. It isn't entirely clear yet why experiences lead to greater happiness, but variety and nostalgia seem likely to play contributing roles.Starfish wrote: ↑Mon Oct 26, 2020 12:17 pmThis is not a problem for somebody who enjoys those experiences. I rank priorities in terms of happiness obtained per $ spent.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
For some people a sports car can be a better investment than other experiences, like traveling for example. Especially a cheap one like a used Miata.
A pair of good skis and ski pass are good investment (as in $ spend per pleasure obtained) for somebody who enjoys skiing.
An expensive bicycle is good investment for somebody who enjoys it and puts a lot of miles on it.
A boat, motorcycle, ATV, RV etc could be very good and worthwhile investments.
The perceived problem is when people do not extract enjoyment from their purchases. This is very relevant for the buyer but is irrelevant from a consumerist perspective. The nature or the society does not care if I enjoy my RV or boat once I bought it.
The Sensible Steward
Re: The Wrong Way to Think About Debt - The White Coat Investor
Some goods are bought to have experiences. Ski gear is a great example. We love to ski. We spend lots of money on the skiing experience. We do it with friends and family which adds to the experience.willthrill81 wrote: ↑Mon Oct 26, 2020 12:21 pmMmany academic studies have found that physical goods have a strong tendency to produce less happiness than intangible experiences. It's clearly not universal and potentially confounded by items such as those you mentioned, but the tendency is still significant. People appear to believe that physical goods will produce lasting happiness, but with relatively few exceptions, they appear to fail to do so. It isn't entirely clear yet why experiences lead to greater happiness, but variety and nostalgia seem likely to play contributing roles.Starfish wrote: ↑Mon Oct 26, 2020 12:17 pmThis is not a problem for somebody who enjoys those experiences. I rank priorities in terms of happiness obtained per $ spent.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
For some people a sports car can be a better investment than other experiences, like traveling for example. Especially a cheap one like a used Miata.
A pair of good skis and ski pass are good investment (as in $ spend per pleasure obtained) for somebody who enjoys skiing.
An expensive bicycle is good investment for somebody who enjoys it and puts a lot of miles on it.
A boat, motorcycle, ATV, RV etc could be very good and worthwhile investments.
The perceived problem is when people do not extract enjoyment from their purchases. This is very relevant for the buyer but is irrelevant from a consumerist perspective. The nature or the society does not care if I enjoy my RV or boat once I bought it.
I have a friend whose parents fly the whole family for two weeks to Alaska every summer. That is money spent that the whole family enjoys and cherishes. Sure they can all hang out at someone’s home, but I bet the experience is far better in Alaska.
Like everything, it all depends.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Mortgage in general can be thought of as leverage, paying a fixed rate to hold an asset that (hopefully) will appreciate in the future faster than the interest rate you have paid to hold it. In the US in recent decades this approach has generally worked quite well when used in moderation. In the housing collapse of 2007 - 9, many euphoric, highly leveraged, deeply indebted real estate investors went bankrupt. I personally know some of them. At such times, it's very comforting not to have to make a monthly mortgage or other debt payment as the value of your asset plummets. It is a matter or expected risk versus expected return. The problem is there are only probabilities, no certainty, about whether the risk or the reward will dominate over a particular investor's time frame. No debt/no mortgage improves your financial status in bad times just like quality bonds do. High debt/high leverage on the other hand maximizes expected return but exposes the holder to greater risk and emotional distress in market down cycles. Like everything else in investing there is a tradeoff.
When you're in or approaching retirement my personal belief is that reducing debt including mortgage debt to zero or as close to it as possible is emotionally worth what it costs to pay off that debt up front. Like quality bonds it offers greater peace of mind and financial flexibility right when you need it most. I think reasonable arguments can be made for older investors in or near retirement to take this approach or alternately to downsize the house/condo they live in to lower costs to live in and maintain. Conversely for younger investors with substantial work capital remaining in their futures it may be entirely reasonable to take on more risk with mortgage and shoot for the higher expected long term return.
Garland Whizzer
When you're in or approaching retirement my personal belief is that reducing debt including mortgage debt to zero or as close to it as possible is emotionally worth what it costs to pay off that debt up front. Like quality bonds it offers greater peace of mind and financial flexibility right when you need it most. I think reasonable arguments can be made for older investors in or near retirement to take this approach or alternately to downsize the house/condo they live in to lower costs to live in and maintain. Conversely for younger investors with substantial work capital remaining in their futures it may be entirely reasonable to take on more risk with mortgage and shoot for the higher expected long term return.
Garland Whizzer
Re: The Wrong Way to Think About Debt - The White Coat Investor
Yes I would reiterate my usual response to this line of argument that 'studies' saying 'experiences' give more happiness are basically useless from an individual POV. They might have some relevance in a discussion of 'other people' but sometimes threads are shut down here specifically because they focus on 'other people' and not individual consumption/investment decisions which is supposed to be the focus here.EnjoyIt wrote: ↑Mon Oct 26, 2020 12:33 pmSome goods are bought to have experiences. Ski gear is a great example. We love to ski. We spend lots of money on the skiing experience. We do it with friends and family which adds to the experience.willthrill81 wrote: ↑Mon Oct 26, 2020 12:21 pmMmany academic studies have found that physical goods have a strong tendency to produce less happiness than intangible experiences. It's clearly not universal and potentially confounded by items such as those you mentioned, but the tendency is still significant. People appear to believe that physical goods will produce lasting happiness, but with relatively few exceptions, they appear to fail to do so. It isn't entirely clear yet why experiences lead to greater happiness, but variety and nostalgia seem likely to play contributing roles.Starfish wrote: ↑Mon Oct 26, 2020 12:17 pmThis is not a problem for somebody who enjoys those experiences. I rank priorities in terms of happiness obtained per $ spent.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
For some people a sports car can be a better investment than other experiences, like traveling for example. Especially a cheap one like a used Miata.
A pair of good skis and ski pass are good investment (as in $ spend per pleasure obtained) for somebody who enjoys skiing.
An expensive bicycle is good investment for somebody who enjoys it and puts a lot of miles on it.
A boat, motorcycle, ATV, RV etc could be very good and worthwhile investments.
The perceived problem is when people do not extract enjoyment from their purchases. This is very relevant for the buyer but is irrelevant from a consumerist perspective. The nature or the society does not care if I enjoy my RV or boat once I bought it.
I have a friend whose parents fly the whole family for two weeks to Alaska every summer. That is money spent that the whole family enjoys and cherishes. Sure they can all hang out at someone’s home, but I bet the experience is far better in Alaska.
Like everything, it all depends.
Even besides specialized items like sporting gear, or semi-specialized ones like an expensive bicycle for example, even wholly generic major consumption items like cars are, to many people who spend 'too much' on them (ie more than the poster criticizing them chooses or is able to spend ), also all about the experiences related to owning them. The more expensive of our two cars is basically for road trips featuring remote winding and/or completely deserted roads where the car is very fun to drive: driving the car is the 'experience'. We could take our old SUV instead and the 'experience' would be the same in non driving parts of the trip, and Interstate segments (where the sporty car is driven conservatively), but on Pacific Coast Highway*, US50 in absolute middle of nowhere in UT/NV, remote WV mountain roads etc. it would not be nearly the same, for me. And I could also see that for the biggest (quasi-)consumption item of all for most people, houses, the experience of living in a nicer house. I would not personally see this as much for say expensive jewelry, but there I might fall into the same trap people who don't value fun driving fall into in when they assess sporty car purchases: the experience related to the car doesn't appeal to *them*, so they slip into declaring that it just isn't objectively worth much, employing 'studies' as justification for their personal preference. Most often it seems to be airplane/foreign travel: people who like airplane trips (and driving usually crap rental cars once there) telling me 'studies' say I should share their preference.
*I've done this one, PCH between Morro Bay and Monterrey in a big rented SUV: after awhile, 'please let this be over soon', and my M2, 'crap, this is over already?' Both were 'experiences' but totally different ones. OK, I could rent a less totally unsuitable vehicle for that segment if only two people (more people were along on the SUV trip) but it's not easy to long distance one-way rent actually fun cars.
Re: The Wrong Way to Think About Debt - The White Coat Investor
[quote]
Yes I would reiterate my usual response to this line of argument that 'studies' saying 'experiences' give more happiness are basically useless from an individual POV. They might have some relevance in a discussion of 'other people' but sometimes threads are shut down here specifically because they focus on 'other people' and not individual consumption/investment decisions which is supposed to be the focus here.
Even besides specialized items like sporting gear, or semi-specialized ones like an expensive bicycle for example, even wholly generic major consumption items like cars are, to many people who spend 'too much' on them (ie more than the poster criticizing them chooses or is able to spend ), also all about the experiences related to owning them. The more expensive of our two cars is basically for road trips featuring remote winding and/or completely deserted roads where the car is very fun to drive: driving the car is the 'experience'. We could take our old SUV instead and the 'experience' would be the same in non driving parts of the trip, and Interstate segments (where the sporty car is driven conservatively), but on Pacific Coast Highway*, US50 in absolute middle of nowhere in UT/NV, remote WV mountain roads etc. it would not be nearly the same, for me. And I could also see that for the biggest (quasi-)consumption item of all for most people, houses, the experience of living in a nicer house. I would not personally see this as much for say expensive jewelry, but there I might fall into the same trap people who don't value fun driving fall into in when they assess sporty car purchases: the experience related to the car doesn't appeal to *them*, so they slip into declaring that it just isn't objectively worth much, employing 'studies' as justification for their personal preference. Most often it seems to be airplane/foreign travel: people who like airplane trips (and driving usually crap rental cars once there) telling me 'studies' say I should share their preference.
*I've done this one, PCH between Morro Bay and Monterrey in a big rented SUV: after awhile, 'please let this be over soon', and my M2, 'crap, this is over already?' Both were 'experiences' but totally different ones. OK, I could rent a less totally unsuitable vehicle for that segment if only two people (more people were along on the SUV trip) but it's not easy to long distance one-way rent actually fun cars.
[/quote]
And then it gets a bit more complex when we pay extra money for small improvements. In your example paying an extra $15k for an M3 as opposed to your M2. Having an extra 500 sqft of a house. Having an extra 25k sqft of land. Each of these incremental increases may provide increased value but at a diminishing return.
I can have just as much fun driving a 3 year old M2 as I would a brand new one. I don’t think the extra $15k-$20k for new would make any difference for me. Someone else might say they would have just as much fun in a used Miata or the additional expense of an M2 is of little value.
This is where it starts to get complicated and if the expense is even worth the extra time needed to earn money to afford that expense. The Starbucks addicts is my favorite example. I work with people who make Starbucks runs at 1-2 times a day. To me paying so much money for bad coffee is a complete waste and costs a few years of extra employment to cover that addiction. Despite that, these people gladly buy that coffee every day thinking it has value.
Yes I would reiterate my usual response to this line of argument that 'studies' saying 'experiences' give more happiness are basically useless from an individual POV. They might have some relevance in a discussion of 'other people' but sometimes threads are shut down here specifically because they focus on 'other people' and not individual consumption/investment decisions which is supposed to be the focus here.
Even besides specialized items like sporting gear, or semi-specialized ones like an expensive bicycle for example, even wholly generic major consumption items like cars are, to many people who spend 'too much' on them (ie more than the poster criticizing them chooses or is able to spend ), also all about the experiences related to owning them. The more expensive of our two cars is basically for road trips featuring remote winding and/or completely deserted roads where the car is very fun to drive: driving the car is the 'experience'. We could take our old SUV instead and the 'experience' would be the same in non driving parts of the trip, and Interstate segments (where the sporty car is driven conservatively), but on Pacific Coast Highway*, US50 in absolute middle of nowhere in UT/NV, remote WV mountain roads etc. it would not be nearly the same, for me. And I could also see that for the biggest (quasi-)consumption item of all for most people, houses, the experience of living in a nicer house. I would not personally see this as much for say expensive jewelry, but there I might fall into the same trap people who don't value fun driving fall into in when they assess sporty car purchases: the experience related to the car doesn't appeal to *them*, so they slip into declaring that it just isn't objectively worth much, employing 'studies' as justification for their personal preference. Most often it seems to be airplane/foreign travel: people who like airplane trips (and driving usually crap rental cars once there) telling me 'studies' say I should share their preference.
*I've done this one, PCH between Morro Bay and Monterrey in a big rented SUV: after awhile, 'please let this be over soon', and my M2, 'crap, this is over already?' Both were 'experiences' but totally different ones. OK, I could rent a less totally unsuitable vehicle for that segment if only two people (more people were along on the SUV trip) but it's not easy to long distance one-way rent actually fun cars.
[/quote]
And then it gets a bit more complex when we pay extra money for small improvements. In your example paying an extra $15k for an M3 as opposed to your M2. Having an extra 500 sqft of a house. Having an extra 25k sqft of land. Each of these incremental increases may provide increased value but at a diminishing return.
I can have just as much fun driving a 3 year old M2 as I would a brand new one. I don’t think the extra $15k-$20k for new would make any difference for me. Someone else might say they would have just as much fun in a used Miata or the additional expense of an M2 is of little value.
This is where it starts to get complicated and if the expense is even worth the extra time needed to earn money to afford that expense. The Starbucks addicts is my favorite example. I work with people who make Starbucks runs at 1-2 times a day. To me paying so much money for bad coffee is a complete waste and costs a few years of extra employment to cover that addiction. Despite that, these people gladly buy that coffee every day thinking it has value.
A time to EVALUATE your jitters: |
viewtopic.php?p=1139732#p1139732
Re: The Wrong Way to Think About Debt - The White Coat Investor
Sure, but I think everyone would agree that incremental differences have a subjective variable impact, as well as that for some people getting Starbucks every day (or driving an M car) could seriously affect their financial future in $ and cents, but for other people one or both just would never be enough to matter. Plus I know some people like Miata's but you can't fit two people's luggage, hiking gear and well liked food items from home for a several thousand mile road trip into a Miata, or a Huracan for that matter, but you can (just) stuff them into an M2. So there are objective elements too, in particular uses of the vehicle for 'experiences'.EnjoyIt wrote: ↑Mon Oct 26, 2020 2:47 pm And then it gets a bit more complex when we pay extra money for small improvements. In your example paying an extra $15k for an M3 as opposed to your M2. Having an extra 500 sqft of a house. Having an extra 25k sqft of land. Each of these incremental increases may provide increased value but at a diminishing return.
I can have just as much fun driving a 3 year old M2 as I would a brand new one. I don’t think the extra $15k-$20k for new would make any difference for me. Someone else might say they would have just as much fun in a used Miata or the additional expense of an M2 is of little value.
This is where it starts to get complicated and if the expense is even worth the extra time needed to earn money to afford that expense. The Starbucks addicts is my favorite example. I work with people who make Starbucks runs at 1-2 times a day. To me paying so much money for bad coffee is a complete waste and costs a few years of extra employment to cover that addiction. Despite that, these people gladly buy that coffee every day thinking it has value.
Anyway the point where I see some disagreement is the (IMO) generally bogus distinction, not just 'problematic in some cases' etc, between 'things' and 'experiences'. They overlap way too much even in general to be spoken of as different things. Again seems to me the theme of this is often to push airplane/international travel (which is fine for people who especially like it) as a superior use of money. And 'studies' finding averages are basically irrelevant in general to specific individual consumption decisions.
Re: The Wrong Way to Think About Debt - The White Coat Investor
How does Porsche 911 fit into the dynamic?
AV111
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Re: The Wrong Way to Think About Debt - The White Coat Investor
This.
I do use cash back credit cards to pay for things, but balance always paid in full each month.
No debt/loans.
No mortgage (paid off a few of them over the years).
Peace of mind.
[/quote]
Rowan Oak - You must have a less than perfect credit score then as you have not demonstrated your ability to manage "different types" of credit.
Same here, I keep getting "suggestions" on how to improve my exceptional credit score. Get a new mortgage so I have new experience with mortgages. I have old experience, I know how to pay them so they go away. The credit world is nuts.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Biggest thing I took from this really informative article is that, once you hit a certain percentage of debt ratio to assets, it doesn't really matter all that much.
Re: The Wrong Way to Think About Debt - The White Coat Investor
Skiing in this case isn't buying stuff (consumerism) but buying experiences. Same for travel. Skiing just happens to be on the expensive end of the spectrum for life experiences. Something like hiking or playing soccer is on the less expensive end. Travel can run the gamut...makingmistakes wrote: ↑Sun Oct 25, 2020 7:01 amAnd people like me who don’t get any lasting pleasure from consumerism, or don’t view working as “wasting their entire lives”, can’t relate to your viewStarfish wrote: ↑Mon Oct 12, 2020 7:50 pm I personally cannot relate at all to the article. It addresses only a category of people, the ones with an uncontrollable spending issue. I personally don't know closely any of those people so I cannot relate.
Yes, buying a ski ticket while having a mortgage is like borrowing money for skiing. That is the point! Disregarding the value of time and youth it's a very big mistake. Even bigger than not saving enough for retirement! Of course I want to ski while I enjoy it, not in my 70s when I am financially secure. If it costs 3% a year, so be it.
I know people who have a lot of money but they did not do much except working until late in their 40s. They started to spend money recently. Regardless of how much they spend now they will never enjoy it as much as the would have in their 20s. In my opinion this is a fundamental mistake in how they lived their lives. It's the old stereotype about Americans and Japanese who travel the world in their 60s, 70s, 80s (or buying or Porsche or whatever) after wasting their entire lives working. It's too late. They should have done that in their 20s, 30s, 40s.
But if you can't relate to the concept that somethings are better done while young that probably means you missed out on some things in your youth...if you are still young, take it from this older guy that stuff you used to do hurts more and you heal slower when you get to a certain age.
I never liked bumps but now with my knees the way they are I avoid them like the plague. Still...when you are young and bulletproof...
Re: The Wrong Way to Think About Debt - The White Coat Investor
"There are many roads to Dublin, the most appropriate is the best road you are comfortable to drive that leads from where you are, not the road another shows you. The motorway may be faster, but you might like the scenery of the winding roads, or just be safer in slower traffic....."EnjoyIt wrote: ↑Sun Oct 25, 2020 12:12 amAbsolutely, depending on market results, some pathways are faster than others. A good example would have been if I stayed at 100% equities the entire time as well. Instead I had some bonds which delayed financial independence by a year or so. If only hindsight could be monetized.Frugalbear wrote: ↑Sat Oct 24, 2020 11:12 pmLooks like there is more than one way to get to FI.EnjoyIt wrote: ↑Sat Oct 17, 2020 3:22 pmThat’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.Toons wrote: ↑Sat Oct 17, 2020 2:37 pmAppreciate 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.
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.
Re: The Wrong Way to Think About Debt - The White Coat Investor
Great points.Freetime76 wrote: ↑Thu Oct 15, 2020 9:44 amThis is KEY, IMHO.willthrill81 wrote: ↑Wed Oct 14, 2020 9:47 pmSpot on Jim. It's not merely a question of arbitrage, as many believe that it is. Those costs you've laid out were a big reason why we chose to live in a 1,200 sq. ft. home that we paid off in five years. Now that we're plowing half of our gross income into retirement accounts, 'we don't need no stinking arbitrage'.White Coat Investor wrote: ↑Wed Oct 14, 2020 9:27 pm For example, some people even in this thread talk about how leveraging their home mortgage brought them all this wealth. But if they had had to pay off their home 5-10 years after buying it, they would have bought less home, paid less in interest/tax/insurance/utilities/maintenance/upkeep/furnishing costs etc and gotten rich even faster by having more to invest.
When we spend actual dollars, it’s linked to how hard we worked for it, what we gave up to save it, what else we’re not doing because we are spending those dollars on X. Otherwise, it’s just a number on the page.
(I have a working theory that the nice, new pickup or SUV No Way would cost on the order of 40-50K if anyone actually PAID FOR IT. Not sure if there is a WCI article on this topic.)
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger
Re: The Wrong Way to Think About Debt - The White Coat Investor
Skiing could be. I have a relative that gets new skis every 1-2 years. New gear isn’t cheap.nigel_ht wrote: ↑Tue Oct 27, 2020 2:03 pmSkiing in this case isn't buying stuff (consumerism) but buying experiences. Same for travel. Skiing just happens to be on the expensive end of the spectrum for life experiences. Something like hiking or playing soccer is on the less expensive end. Travel can run the gamut...makingmistakes wrote: ↑Sun Oct 25, 2020 7:01 amAnd people like me who don’t get any lasting pleasure from consumerism, or don’t view working as “wasting their entire lives”, can’t relate to your viewStarfish wrote: ↑Mon Oct 12, 2020 7:50 pm I personally cannot relate at all to the article. It addresses only a category of people, the ones with an uncontrollable spending issue. I personally don't know closely any of those people so I cannot relate.
Yes, buying a ski ticket while having a mortgage is like borrowing money for skiing. That is the point! Disregarding the value of time and youth it's a very big mistake. Even bigger than not saving enough for retirement! Of course I want to ski while I enjoy it, not in my 70s when I am financially secure. If it costs 3% a year, so be it.
I know people who have a lot of money but they did not do much except working until late in their 40s. They started to spend money recently. Regardless of how much they spend now they will never enjoy it as much as the would have in their 20s. In my opinion this is a fundamental mistake in how they lived their lives. It's the old stereotype about Americans and Japanese who travel the world in their 60s, 70s, 80s (or buying or Porsche or whatever) after wasting their entire lives working. It's too late. They should have done that in their 20s, 30s, 40s.
But if you can't relate to the concept that somethings are better done while young that probably means you missed out on some things in your youth...if you are still young, take it from this older guy that stuff you used to do hurts more and you heal slower when you get to a certain age.
I never liked bumps but now with my knees the way they are I avoid them like the plague. Still...when you are young and bulletproof...
Scuba is another expensive experience.
Tracking a car is even more expensive.
Edit: edited to add flying a plane.
A time to EVALUATE your jitters: |
viewtopic.php?p=1139732#p1139732
Re: The Wrong Way to Think About Debt - The White Coat Investor
Actually, I've been wondering about your take on my approach to debt and consumption after reading the article and your responses in this thread. I try my best to ensure that the value of my portfolio never dips below the value of my debt and that the interest on that debt remains below the expected return of my portfolio (so far, so good on both fronts). In general, I am fairly comfortable with the amount of risk I am undertaking. I also keep the minimum necessary cash on hand to service that debt and cover the cost of consumption on a monthly basis. Everything else is invested. Unexpected expenses (e.g. emergencies, vacations, and boats) beyond monthly expenses (e.g. rent, insurance, and groceries) are handled by selling investments without eating into the theoretically "debt-funded" portion of my portfolio (since the money is fungible). I also wrote a script which does all the math for me so I spend no more than a few minutes every month managing my money (and I would be doing this anyway since I seek to be maximally invested at all times regardless of debt).White Coat Investor wrote: ↑Wed Oct 14, 2020 6:22 pmThis 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.
Am I still borrowing to consume? If not, am I making some other mistake? The only possible black hole I see is capital gains tax, but some quick back-of-the-napkin math suggests that shouldn't become much of an issue unless I enter a much higher tax bracket.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Sounds like mental accounting to me. I'm not saying borrowing to consume is a mistake, but since money is fungible you're certainly doing it like everybody else who owes anything. Your 100% assets to debt ratio is also higher than what I've seen recommended.cos wrote: ↑Tue Oct 27, 2020 5:06 pmActually, I've been wondering about your take on my approach to debt and consumption after reading the article and your responses in this thread. I try my best to ensure that the value of my portfolio never dips below the value of my debt and that the interest on that debt remains below the expected return of my portfolio (so far, so good on both fronts). In general, I am fairly comfortable with the amount of risk I am undertaking. I also keep the minimum necessary cash on hand to service that debt and cover the cost of consumption on a monthly basis. Everything else is invested. Unexpected expenses (e.g. emergencies, vacations, and boats) beyond monthly expenses (e.g. rent, insurance, and groceries) are handled by selling investments without eating into the theoretically "debt-funded" portion of my portfolio (since the money is fungible). I also wrote a script which does all the math for me so I spend no more than a few minutes every month managing my money (and I would be doing this anyway since I seek to be maximally invested at all times regardless of debt).White Coat Investor wrote: ↑Wed Oct 14, 2020 6:22 pmThis 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.
Am I still borrowing to consume? If not, am I making some other mistake? The only possible black hole I see is capital gains tax, but some quick back-of-the-napkin math suggests that shouldn't become much of an issue unless I enter a much higher tax bracket.
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
Re: The Wrong Way to Think About Debt - The White Coat Investor
Do I understand this accurately, as your portfolio grows, you keep borrowing more and more money to keep your debt to invested assets ratio at 1:1?cos wrote: ↑Tue Oct 27, 2020 5:06 pmActually, I've been wondering about your take on my approach to debt and consumption after reading the article and your responses in this thread. I try my best to ensure that the value of my portfolio never dips below the value of my debt and that the interest on that debt remains below the expected return of my portfolio (so far, so good on both fronts). In general, I am fairly comfortable with the amount of risk I am undertaking. I also keep the minimum necessary cash on hand to service that debt and cover the cost of consumption on a monthly basis. Everything else is invested. Unexpected expenses (e.g. emergencies, vacations, and boats) beyond monthly expenses (e.g. rent, insurance, and groceries) are handled by selling investments without eating into the theoretically "debt-funded" portion of my portfolio (since the money is fungible). I also wrote a script which does all the math for me so I spend no more than a few minutes every month managing my money (and I would be doing this anyway since I seek to be maximally invested at all times regardless of debt).White Coat Investor wrote: ↑Wed Oct 14, 2020 6:22 pmThis 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.
Am I still borrowing to consume? If not, am I making some other mistake? The only possible black hole I see is capital gains tax, but some quick back-of-the-napkin math suggests that shouldn't become much of an issue unless I enter a much higher tax bracket.
What happens when the market decreases, do you sell bonds or equities at a loss to pay down some of that debt to get back to 1:1?
A time to EVALUATE your jitters: |
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Re: The Wrong Way to Think About Debt - The White Coat Investor
I believe that research found that the experiences bonus kicked in at moderate-to-upper levels of income. That is, if one has a house and car, the marginal value of a nicer home or better car is typically outweighed by the value of a nicer vacation. I'm not sure how well it applies more generally or in lower income brackets.willthrill81 wrote: ↑Mon Oct 26, 2020 12:21 pmMmany academic studies have found that physical goods have a strong tendency to produce less happiness than intangible experiences. It's clearly not universal and potentially confounded by items such as those you mentioned, but the tendency is still significant. People appear to believe that physical goods will produce lasting happiness, but with relatively few exceptions, they appear to fail to do so. It isn't entirely clear yet why experiences lead to greater happiness, but variety and nostalgia seem likely to play contributing roles.Starfish wrote: ↑Mon Oct 26, 2020 12:17 pmThis is not a problem for somebody who enjoys those experiences. I rank priorities in terms of happiness obtained per $ spent.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
For some people a sports car can be a better investment than other experiences, like traveling for example. Especially a cheap one like a used Miata.
A pair of good skis and ski pass are good investment (as in $ spend per pleasure obtained) for somebody who enjoys skiing.
An expensive bicycle is good investment for somebody who enjoys it and puts a lot of miles on it.
A boat, motorcycle, ATV, RV etc could be very good and worthwhile investments.
The perceived problem is when people do not extract enjoyment from their purchases. This is very relevant for the buyer but is irrelevant from a consumerist perspective. The nature or the society does not care if I enjoy my RV or boat once I bought it.
(I have both skis and a fancy bicycle, but it's not like I sit around admiring the purchases -- they're used for experiencing skiing or climbing mountain passes.)
Re: The Wrong Way to Think About Debt - The White Coat Investor
White Coat Investor wrote: ↑Tue Oct 27, 2020 6:33 pm Sounds like mental accounting to me. I'm not saying borrowing to consume is a mistake, but since money is fungible you're certainly doing it like everybody else who owes anything. Your 100% assets to debt ratio is also higher than what I've seen recommended.
I was afraid that I would fail to communicate this well. It's the opposite. I work to avoid anything less than a 1:1 asset-to-debt ratio. That is, I make sure to never spend enough assets that I drop below a 1:1 asset-to-debt ratio, and I consider myself "broke" whenever that ratio is breached. Outside of large unexpected purchases (i.e. emergency repairs), my asset-to-debt ratio is normally quite a bit higher than 1:1, and I suspect that as I get further in my career, my accumulated savings will dwarf any debt that I carry.EnjoyIt wrote: ↑Tue Oct 27, 2020 7:01 pm Do I understand this accurately, as your portfolio grows, you keep borrowing more and more money to keep your debt to invested assets ratio at 1:1?
What happens when the market decreases, do you sell bonds or equities at a loss to pay down some of that debt to get back to 1:1?
Also, for the sake of completeness in my explanation, here's how I would deal with new debt. I don't have a mortgage, but if I took one out, I'd probably make it interest-only and, rather than paying it off, I'd simply increase my saving rate until I'd matched the principal owed, reestablishing a 1:1 asset-to-debt ratio. I'd consider myself "broke" in the meantime and avoid any extraneous purchases.
Yes, I realize that this is all mental accounting, but I think it translates into real accounting quite well. I model my debts as investments with negative expected returns (negative assets? liabilities?) and work with the portfolio as a whole. I suppose one could write an optimizer which takes these "negative assets" into account, but I don't see why my end result would be all that different given my CRRA. In fact, such an optimizer would probably suggest taking on additional debt to meet some optimal level of leverage.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
The hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
Potential - distraction = performance.
Re: The Wrong Way to Think About Debt - The White Coat Investor
Unless you can pay off the mortgage entirely paying down principal faster doesn’t actually reduce risk of foreclosure in that scenario.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 amThe hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
Even if you lose 80% of the invested funds, 20% is still available in case of dire need.
Since this has only happened once (aka 1929) the rewards likely outweigh the risks...go 100/0, track your extra payment, when you hit payoff + taxes with that investment, sell and pay off mortgage.
Preferably not in the middle of a crash...
Given that BH investment strategy is based on the US market always recovering the risks are low to moderate and the gains higher than paying down mortgage faster.
Probably total lifetime risk is lower...
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Re: The Wrong Way to Think About Debt - The White Coat Investor
nigel_ht wrote: ↑Wed Oct 28, 2020 8:34 amUnless you can pay off the mortgage... Exactly.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 amThe hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
Since this has only happened once (aka 1929) ... What about 2008-2009?
Probably total lifetime risk is lower... Probability over a lifetime may in fact be lower. The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.
Potential - distraction = performance.
Re: The Wrong Way to Think About Debt - The White Coat Investor
The presumption is that you can't pay off the mortgage...hence 15 yr mortgage.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 8:44 amnigel_ht wrote: ↑Wed Oct 28, 2020 8:34 amUnless you can pay off the mortgage... Exactly.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 amThe hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
If you can, then the risk of foreclosure is even lower.
Real estate dropped 33% [1]...the S&P 500 dropped 54.8%.Since this has only happened once (aka 1929) ... What about 2008-2009?
Which means about 45% percent of your extra payments are still available to pay expenses in 2008.
Of course, to suffer a 33% loss means you purchased at the peak so there were barely any extra payments anyway.
You just said it wasn't a matter of fortitude or discipline.Probably total lifetime risk is lower... Probability over a lifetime may in fact be lower. The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.
Right here:
The risk exists either way but paying down principle early doesn't reduce that risk because you have less liquidity during the "ruinous circumstances".These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue.
Gotta love how some folks will move goalposts when the math goes "nuh uh".
Don't get me wrong, I'm a belt and suspenders kind of guy for investing but I'm not going to lie to myself that the suspenders aren't redundant and don't make me look silly.
[1] https://www.washingtonpost.com/news/bus ... the-crash/
Re: The Wrong Way to Think About Debt - The White Coat Investor
Again it really seems to be one particular type of 'experience', air/foreign travel, which is touted in regard to 'studies' and the two big items which generate a lot of 'experiences', cars and houses, are arbitrarily dubbed 'just things'. So the 'studies' are interpreted as 'things' v 'experiences' but just as easily characterized as a popularity contest between one particular type of experience (air travel vacations) v. others.getthatmarshmallow wrote: ↑Tue Oct 27, 2020 7:15 pmI believe that research found that the experiences bonus kicked in at moderate-to-upper levels of income. That is, if one has a house and car, the marginal value of a nicer home or better car is typically outweighed by the value of a nicer vacation. I'm not sure how well it applies more generally or in lower income brackets.willthrill81 wrote: ↑Mon Oct 26, 2020 12:21 pmMmany academic studies have found that physical goods have a strong tendency to produce less happiness than intangible experiences. It's clearly not universal and potentially confounded by items such as those you mentioned, but the tendency is still significant.Starfish wrote: ↑Mon Oct 26, 2020 12:17 pmThis is not a problem for somebody who enjoys those experiences.willthrill81 wrote: ↑Mon Oct 26, 2020 11:59 amIt can be difficult to clearly delineate experiences from objects when can create experiences. But most objects aren't very good at creating varied experiences. They tend to produce the same experience over and over. Some are better at it though, like boats and ATVs.
(I have both skis and a fancy bicycle, but it's not like I sit around admiring the purchases -- they're used for experiencing skiing or climbing mountain passes.)
Also I would think this 'experiences' effect would not be monotonic by income but also depend just generally how much you naturally like to spend v how much money you have. BMW or world travel? No reason to look to 'studies' if you can afford both (to the extent of how often and which BMW's or vacations you'd buy). It's for people who want both but can't really afford both. That's the general state of even the upper middle class, so it wouldn't necessarily even occur to social 'scientists' designing the 'studies' to consider people who are not constrained because they naturally spend in total below their means. Such people are fairly unusual in general, but quite common on this forum.
Nor am I really convinced that buying stuff just to 'sit around admiring it' doesn't work for some things/people also. Again though at least with an expensive watch it's actually mainly legitimate IMO to say it's a 'thing' and the 'experience' would be mainly having the thing. That's just not accurate for cars for me. And while we didn't buy an extremely expensive house, it eventually became extremely expensive, now a lot of capital tied up in it. If we don't sell it and move to a cheaper area to free up some of that capital to make a full return (IOW not pay as much owner imputed rent as now), the reason will be the experience of living in this house and the neighborhood/city. Just not seeing 'experience' as defined in 'studies' (or other people's reading of 'studies') as a useful term for distinguishing what's more or less valuable to me.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
nigel_ht wrote: ↑Wed Oct 28, 2020 9:15 amThe presumption is that you can't pay off the mortgage...hence 15 yr mortgage. Actually the presumption is that you can either pay down the mortgage early OR invest those extra dollars.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 8:44 amnigel_ht wrote: ↑Wed Oct 28, 2020 8:34 amUnless you can pay off the mortgage... Exactly.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 amThe hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
By the way... An article in the Washington Post is hardly a reference and I hope that is not the entire basis for your "math".
Real estate dropped 33% [1]...the S&P 500 dropped 54.8%.Since this has only happened once (aka 1929) ... What about 2008-2009?
Which means about 45% percent of your extra payments are still available to pay expenses in 2008.
Of course, to suffer a 33% loss means you purchased at the peak so there were barely any extra payments anyway.
You just said it wasn't a matter of fortitude or discipline. Exactly... And I still am. "The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.[/color]"Probably total lifetime risk is lower... Probability over a lifetime may in fact be lower. The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.
The risk exists either way. Thank you. That was my entire point.
Gotta love how some folks will move goalposts when the math goes "nuh uh". I am not sure exactly how you define the goal posts of this discussion or at what point you perceive them as having been moved, or even where to for that matter, but I am glad that we agree that there is risk in debt and that risk is material. As such it goes beyond what can be managed with mental fortitude and discipline alone. Have yourself a super wonderful day.
Potential - distraction = performance.
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Re: The Wrong Way to Think About Debt - The White Coat Investor
Those are unpleasant circumstances you describe. But the alternative is even more unpleasant: You spend the early part of your career paying down the mortgage and holding no stocks. That sounds safe. But now to get the same expected return, you have to hold a riskier AA for the rest of your life. That makes you even more vulnerable to stock market risk. You removed stock market risk in early career and increased it later on. This concentration of stock risk means higher risk over a lifetime for the same expected return.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 amThe hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.Ben Mathew wrote: ↑Mon Oct 12, 2020 6:53 pm The article does not address lifecycle considerations.
My wife and I are in our mid 40s, and we have a 15 year mortgage that we could be paying down faster. Instead, the extra savings are going into a 100% stock portfolio. This strategy better distributes our stock risk over our lives. People usually have too little stock risk when young (since most of their contributions aren't in yet), and too much risk closer to retirement (when their portfolios are full). Spreading out stock risk by increasing risk stock exposure in earlier years and reducing it closer to retirement results in lower risk over a lifetime for the same expected return.
If a young investor understands this principle well and has the mental fortitude and discipline to sustain large losses and gains with equanimity when young, then this has a lot of potential for improving one's lifetime risk-return profile.
This is not about how much risk to take. It's about how to take the risk. Whether you want to take a little bit of risk or a lot of risk, it's best to spread the risk across assets and across time as much as possible--diversification. Paying down the mortgage first before you invest in stocks concentrates stock risk into fewer years. So it increases risk over a lifetime. The illusion that it reduces risk comes from focusing on current circumstances without considering the implications over a lifetime. A young person not taking bets is not really safe if that means they have to take big bets when they are older. Whatever they want to bet, they should spread the bets over a lifetime. That is one of the main takeaways of lifecycle investing.
Total Portfolio Allocation and Withdrawal (TPAW)
Re: The Wrong Way to Think About Debt - The White Coat Investor
Pay DOWN and Pay OFF are two different things.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 10:39 amnigel_ht wrote: ↑Wed Oct 28, 2020 9:15 amThe presumption is that you can't pay off the mortgage...hence 15 yr mortgage. Actually the presumption is that you can either pay down the mortgage early OR invest those extra dollars.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 8:44 amnigel_ht wrote: ↑Wed Oct 28, 2020 8:34 amUnless you can pay off the mortgage... Exactly.Orbuculum Nongata wrote: ↑Wed Oct 28, 2020 7:56 am
The hole in this bucket presents itself during a downturn in which one loses their source of income AND experiences investment loss COMBINED WITH a reduction in property value WHILE they still have a mortgage to pay. These ruinous circumstances occur in such a combination. At that point, mental fortitude and discipline are not the issue. "Stock risk" isn't the only risk in the debt/investment equation. Debt risk exists as well.
By the way... An article in the Washington Post is hardly a reference and I hope that is not the entire basis for your "math".
If you can afford to Pay OFF the mortgage the risk of foreclosure is minimal regardless of whether you actually pay it off or not.
The WaPo article simple give us the general magnitude of losses in the real estate market during the crash. Actual declines in property value isn't something as easily determined as the decline of the S&P 500. It is immaterial to the calculation.
Paying down your mortgage INCREASES your risk of foreclosure.
No you wrote that it didn't matter if you had fortitude or discipline because if you didn't pay down you'd lose your house. The math shows this is untrue. Then you changed your tune to "whether or not fortitude and discipline will carry the day when it presents".You just said it wasn't a matter of fortitude or discipline. Exactly... And I still am. "The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.[/color]"Probably total lifetime risk is lower... Probability over a lifetime may in fact be lower. The question is whether or not the risk exists and whether or not fortitude and discipline will carry the day when it presents.
The risk exists either way. Thank you. That was my entire point.
The risk is increased if you pay down your mortgage. If you can pay off your mortgage the risk is minimal regardless. The opportunity cost of paying off your mortgage is quite high.
No it doesn't go "beyond what can be managed with mental fortitude and discipline alone"...if you pay down your mortgage you increase risk.Gotta love how some folks will move goalposts when the math goes "nuh uh". I am not sure exactly how you define the goal posts of this discussion or at what point you perceive them as having been moved, or even where to for that matter, but I am glad that we agree that there is risk in debt and that risk is material. As such it goes beyond what can be managed with mental fortitude and discipline alone. Have yourself a super wonderful day.
If you had enough to pay off your mortgage you have enough money that you have no foreclosure risk even in 2008 because even with a 50% drop in your portfolio you'd STILL have years worth of payments left in your portfolio.
Paying down your mortgage is generally dumb if you have the discipline to invest that money as opposed to spending it. ESPECIALLY if your job is at risk in a downturn. You are always safer to put the extra payment into your EF or into your AA until you can pay off the full amount.