Biggest_Downside_To_Paying_Off_Your_Mortgage
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai, and in this episode I want to specifically
00:00:04.160 | talk about paying down mortgage debt or investing.
00:00:08.120 | It's a favorite topic that definitely generates a lot of opinions and a lot of emotion too
00:00:13.840 | for some reason.
00:00:16.520 | Debt can help us get wealthier and live a better life, but also debt can ruin us and
00:00:21.400 | make us feel not so good, stressed, take jobs that we otherwise wouldn't want because we
00:00:28.640 | have to pay off this debt.
00:00:30.080 | I think most of us take on a mortgage because we simply cannot afford to buy a home in cash.
00:00:36.040 | We just want to live larger than we can really afford, but thanks to innovation of the financial
00:00:41.400 | services industry, we're able to take on different types of mortgages, ARMs, which are my favorite,
00:00:47.800 | 15-year fixed mortgages looking the best right now in terms of what you're seeing on the
00:00:53.260 | averages for the 30-year, 15-year, and ARMs.
00:00:56.640 | Then of course, the 30-year fixed mortgage where I don't think anybody should really
00:01:01.000 | take because the average duration someone lives in a home is about 9 to 10 years.
00:01:06.800 | In other words, in 9 to 10 years, the home is sold or the mortgage is paid off somehow
00:01:12.520 | somewhere.
00:01:13.520 | Therefore, it doesn't make sense to take out a longer term duration loan at a higher rate.
00:01:21.040 | It's an unnecessary expense in my opinion.
00:01:23.640 | Further, interest rates have been coming down for over 35 years now.
00:01:28.320 | What makes you think interest rates are suddenly going to shoot back up now that we have technology,
00:01:33.120 | information efficiency, experience managing inflation and unemployment in previous cycles,
00:01:39.960 | and a coordinated Federal Reserve, international coordination of central banks around the world?
00:01:46.400 | Interest rates are not going to be rocketing higher anytime soon, I don't think in our
00:01:50.640 | lifetimes, therefore, you want to try to at least match the fixed rate duration to the
00:01:56.600 | time you plan to own the home or keep the mortgage.
00:02:00.840 | Given mortgage rates have collapsed since the start of the pandemic, it's very logical
00:02:05.720 | to see demand for real estate go up and refinancing going up and mortgages being held on for a
00:02:14.560 | longer duration of time.
00:02:16.600 | If you've got a 2.5% mortgage or lower, it's hard to get really motivated to pay it off
00:02:24.320 | because when you compare it to, let's say, the S&P 500 dividend yield at around 1.8%,
00:02:30.920 | maybe it's 1.6% now, that spread is not very high.
00:02:35.840 | But if you compare it to the 10-year bond yield, which is at around 1 to 1.2%, a 2.5%
00:02:43.520 | mortgage is more than twice that.
00:02:46.580 | Investing is relative in finance.
00:02:48.520 | We're all trying to figure out how to best maximize and utilize our capital.
00:02:53.680 | Since we don't have endless amount of money like Elon Musk, we always have to decide,
00:02:57.760 | do we put that $1 to paying down debt or do we put that $1 to investing?
00:03:03.600 | And I did talk about creating a system called the Financial Samurai Debt and Investment
00:03:09.080 | Ratio.
00:03:10.720 | It helps you pay down debt or invest based on what the interest rate is.
00:03:15.480 | So for example, if the interest rate is at 3%, I think you use 30% of your free cash
00:03:22.440 | flow to pay down debt.
00:03:23.680 | If the interest rate is at 8%, you would spend 80%.
00:03:27.780 | So it's whatever the interest rate is times 10%.
00:03:30.520 | And if you have interest rate above 10%, you spend all of your free cash flow paying down
00:03:35.920 | debt because that is a really great return on any investment 10% or higher.
00:03:41.600 | So I want to share with you what I think is the biggest downside to paying off debt.
00:03:46.480 | And the biggest downside is losing a tremendous amount of motivation to hustle, to work hard,
00:03:54.120 | and to grow your wealth once your debt is paid off, once that mortgage is paid off.
00:03:58.520 | If you think about it, once you don't have a mortgage, living is pretty cheap, right?
00:04:03.480 | You've got your property taxes, your insurance, your normal maintenance expenses, but they're
00:04:07.440 | not that great.
00:04:10.100 | Food is relatively cheap in America.
00:04:12.460 | That's why most of us eat a lot of food and are larger than we should be.
00:04:17.060 | There's plenty of free or cheap entertainment.
00:04:20.300 | You know, Netflix is like $15 a month for like the high-end package.
00:04:24.120 | You can just get entertained for countless of hours.
00:04:26.820 | You can go walk in the park, you can play tennis, hit softballs, whatever it is.
00:04:32.600 | Life is pretty manageable once you don't have a mortgage.
00:04:36.980 | And so when you don't have that mortgage, any rational person will think, "Well, why
00:04:41.920 | bother working so hard at work?
00:04:43.620 | Why bother trying to get a raise and a promotion?
00:04:46.180 | Why bother trying to start a side hustle or risk a lot of money and time and heartache
00:04:52.160 | starting a business?"
00:04:53.160 | Now, of course, everybody has different levels of motivation, different engines, if you will,
00:05:00.740 | of motivation.
00:05:02.020 | Some of you are just inherently motivated all the darn time, which is great, which is
00:05:06.720 | probably why you're probably going to do pretty well.
00:05:09.580 | For me, I had a lot of motivation growing up because I grew around a lot of poverty
00:05:14.180 | living in Zambia and Malaysia and also Taiwan.
00:05:17.980 | But it was really Malaysia and going to visit India and China in the '90s and the early
00:05:25.100 | 2000s that really motivated me to try to make more money so I wouldn't fall into poverty.
00:05:33.380 | And just seeing the world, seeing how much poverty out there is really a fantastic motivator
00:05:39.600 | to work hard and not take your life in America or whatever developed country you're listening
00:05:45.420 | to this podcast from for granted.
00:05:47.220 | I definitely plan to take my kids to a developing country and to live simply at least for a
00:05:53.900 | summer or two and just see, "Look, life isn't as great as America or how we live everywhere
00:06:00.220 | in the world.
00:06:01.220 | Don't take your parents, your house, your friends, your environment for granted."
00:06:08.140 | I mean, if you go to India, even right now, the pollution is terrible.
00:06:13.060 | Same thing in China.
00:06:14.060 | And you come to most places in America and we can breathe amazing fresh air.
00:06:19.580 | However, over time, that motivation tends to fade if you are making more money, saving
00:06:25.820 | more money and building your wealth.
00:06:27.780 | I think it's really natural to start losing that desire to stay back two hours after your
00:06:34.060 | boss leaves to try to help the firm and help the colleagues and to try to get paid and
00:06:39.980 | promoted.
00:06:41.300 | That hunger just fades.
00:06:42.580 | I remember back in, it was like 2014 and 2015, I was doing some part-time consulting.
00:06:50.180 | One was for Personal Capital, the app that I've been using and recommending on Financial
00:06:54.500 | Samurai since 2012.
00:06:55.500 | I thought that was pretty cool, consulting in the marketing department at a series, I
00:07:01.380 | think it was a series C company at that time.
00:07:06.220 | And then I decided, "You know what?
00:07:07.580 | In 2015, I'm going to pay off my mortgage.
00:07:09.580 | I've had this rental property mortgage since 2003 and I just don't want it anymore."
00:07:14.860 | There was about $91,000 left on the mortgage.
00:07:17.260 | So I said, "I'm going to try to make more money in 2015 so I can pay off the mortgage
00:07:24.300 | that year with new active income, not passive income."
00:07:28.420 | So what did I do?
00:07:30.100 | I decided to find two more consulting gigs.
00:07:32.780 | So for three months in a row, three months in a row, I had three consulting gigs.
00:07:37.660 | I was working about 60 hours a week and I think I was making about $30,000 to $33,000
00:07:43.900 | a month.
00:07:44.900 | And that's a lot of money.
00:07:46.580 | That was a lot of money, but I was motivated.
00:07:48.820 | I was hungry to pay down that mortgage.
00:07:52.060 | And then guess what?
00:07:53.060 | As soon as I paid down that mortgage in 2015, I dropped my consulting gigs.
00:07:58.820 | I didn't look for new ones.
00:08:01.140 | I also decided to go traveling internationally with my wife for weeks.
00:08:05.660 | Then I went to the US Open, the tennis open in New York City for a couple of weeks.
00:08:10.580 | I just basically kicked back.
00:08:12.020 | I was tired.
00:08:13.020 | It was kind of like the day or the month really after studying hard for a final exam.
00:08:20.020 | All my motivation to make extra money went away because there was no more mortgage.
00:08:25.540 | Not only was there no more mortgage, it also meant that the rental income that I was receiving
00:08:30.980 | at the time, more of it went into my pocket.
00:08:33.500 | So I had more cashflow.
00:08:35.300 | In a way, it's kind of like a double whammy against motivation.
00:08:38.420 | One, I have no more mortgage and two, I have higher cashflow.
00:08:43.080 | So when you have both of these things, you naturally just relax and you say, "Hey, life
00:08:47.980 | is pretty easy now, folks.
00:08:50.140 | Let's just go slack off and do whatever it is you want to do."
00:08:53.660 | Now in early 2019, I was able to buy a house with cash, so no mortgage.
00:09:00.240 | And because of that, I really took my sweet time cleaning up the house to prepare it to
00:09:05.300 | find new renters.
00:09:06.300 | And I even rejected completely qualified renters who were going to pay $150 more a month because
00:09:12.600 | I just didn't get a great feeling about them.
00:09:15.520 | I wanted to find the ultimate tenants and hopefully I have, but I won't know for sure
00:09:20.940 | for one or two years down the road.
00:09:23.820 | But because of this, because of the lack of mortgage, I gave up $2,500 or a little bit
00:09:29.740 | more over the course of the year because I didn't hustle as hard as I would have if I
00:09:34.820 | did have a mortgage.
00:09:36.660 | So if you're thinking about paying down your mortgage, I would follow the FSDR methodology.
00:09:42.500 | My mortgage now for my primary residence is at 2.125%.
00:09:47.860 | Therefore I'm going to use about 20%, 21% of my cash flow each month to pay down some
00:09:54.300 | of my mortgage.
00:09:55.300 | And I'm going to use 79 to 80% of my cash flow to basically invest in stocks and new
00:10:02.140 | real estate.
00:10:03.380 | I'm always on the outlook because I think 2021, 2022 are going to be rebound years,
00:10:10.300 | so there's going to be opportunity.
00:10:12.160 | But it's important for all of us to try to forecast when we no longer have the desire
00:10:17.540 | to do anything, to do anything that makes money, to do anything productive.
00:10:21.540 | We just want to really kick back, play golf, sit on the beach, do nothing and live the
00:10:27.020 | good life.
00:10:28.020 | And so you've got to forecast when that'll be.
00:10:30.380 | I think we're all probably going to do a little bit of something, but we're trying to forecast
00:10:34.500 | when the majority of our motivation will dissipate for making money.
00:10:40.180 | And so when that date is set, that is when I think you should be mortgage free.
00:10:46.940 | The matching of that timeline is a little bit tricky.
00:10:50.180 | That's why we should always try to be investing and paying off debt as we go.
00:10:55.380 | My motivation to get my finances right and to protect my capital and to continue growing
00:11:01.340 | passive income is still there.
00:11:03.740 | And the reason why it's still there is because I have two young kids.
00:11:06.900 | And so each kid, funny enough, feels like a mortgage.
00:11:10.100 | They provide me a lot of motivation.
00:11:13.260 | So I'd love to hear from you guys.
00:11:15.020 | What do you think about the biggest downside of paying off your mortgage?
00:11:19.300 | Since our personal capital, our own human capital is generally what makes us the most
00:11:24.980 | amount of money.
00:11:26.860 | Doesn't it make sense that once you have an easy life and you don't have any mortgage
00:11:30.740 | debt, that you would naturally take a step back?
00:11:34.500 | I'd love to know what are your motivations?
00:11:37.800 | What keeps your engine humming to wake up at 5 a.m., to work harder than your peers,
00:11:45.660 | to start a side hustle?
00:11:47.020 | What is that motivating factor?
00:11:48.580 | Because I've been asking a lot of entrepreneurs and people who make a decent amount of money
00:11:55.020 | and probably have great net worths, what drives them?
00:11:58.740 | Because I'm personally struggling with figuring out why bother trying so hard now.
00:12:04.860 | There's always an endless amount of money to make.
00:12:07.420 | Once you think you're going to be happy making 100 grand, 250, 500, whatever it is, once
00:12:11.960 | you get there, you're going to realize, "Hmm, why not just try to make more?"
00:12:17.260 | It's one of those never-ending traps that I tried to get out of in 2012, leaving the
00:12:23.560 | finance industry.
00:12:24.560 | I just didn't care anymore.
00:12:26.700 | The problem is I'm feeling a little bit like this again online.
00:12:31.580 | There's an endless amount of money to make online as well.
00:12:34.580 | I just am trying to find how much is enough and how you all, if you guys can provide me
00:12:39.100 | some feedback, how did you find you're enough?
00:12:43.220 | Or is it impossible to find it?
00:12:44.940 | Are you never going to be satisfied?
00:12:46.540 | All right, that wraps things up for this episode.
00:12:48.740 | If you like the episode, I'd appreciate a positive review and some nice comments.
00:12:53.700 | Until next time, I'll talk to you guys later.