Should_I_pay_down_debt_or_invest_
00:00:00.000 | Hello everybody it's Sam from Financial Samurai and in this episode I want to
00:00:04.320 | talk about one of my favorite topics paying down or paying off mortgage debt.
00:00:10.680 | Now I am a proponent of paying off mortgage debt faster and sooner and
00:00:17.200 | especially before you retire. I believe the more you pay off your mortgage the
00:00:22.620 | more courage you will have and I talked about this in an article regarding
00:00:27.320 | buying a house with cash and actually not feeling that bad during the height
00:00:31.560 | of the downturn in March 2020 so far. And I was just talking to my wife and I was
00:00:36.920 | wondering you know things are really bad but they don't seem too bad and I was
00:00:43.280 | thinking to myself what was it that made me feel more sanguine versus back in
00:00:48.440 | 2008 and 2009 when we didn't have any kids and it was just us to provide for.
00:00:53.760 | You would think that with two kids we would be freaking out even more right
00:00:58.920 | two kids, two mouths to feed, tuition, just unknown expenses out the wazoo. But that
00:01:05.840 | one thing that kept us more calm I think was not having a mortgage and this is
00:01:10.320 | the first time we have never had a mortgage in our entire lives in our
00:01:15.120 | private residence. In the past our expenses our housing expenses were about
00:01:20.840 | I don't know 10% of our gross income something like that and that's the level
00:01:26.080 | I think that everybody should try to shoot for 10% or less just like the
00:01:29.960 | 1/10 rule for car buying. If you've got your housing expense whether it's rent
00:01:33.960 | or your mortgage, property tax and all that below 10% of your gross income I
00:01:38.560 | think you're gonna feel a really good sense of calm and so we took this a step
00:01:42.880 | further and lowered it to about 3% or maybe it's like 2% of our gross
00:01:47.920 | income I don't know what it is but it's much lower and we feel even better. So
00:01:52.720 | you've got to ask yourself how much is the feeling of calm and peace of mind
00:01:58.560 | worth to you? As we age we should get wealthier and as we age our lives get a
00:02:04.560 | little bit more difficult and complicated because we might have health
00:02:07.840 | issues or we might have to take care of our aging parents or kids for that
00:02:12.160 | matter. Whatever the case may be life is not gonna be what you expect it to be at
00:02:18.680 | least not exactly that is. For example for us we didn't expect to have two kids
00:02:23.320 | at this age and I'm almost gonna be 43 and my wife's almost gonna be 40. I
00:02:28.240 | thought maybe we'd have one kid or no kids and just life just changes so
00:02:33.480 | always expect some change. So with regards to paying off mortgage debt and
00:02:37.840 | investing I believe you should do both. If you are in the early part of your
00:02:42.160 | wealth accumulating stage or in the middle part you should do both and I
00:02:46.840 | have this thing called the FS-DARE methodology which is called Financial
00:02:50.680 | Samurai's Debt and Investment Ratio and basically it's a smart way to think
00:02:55.600 | about investing and paying off debt no matter where you are in your life. FS-DARE
00:03:00.560 | is based on the debt interest rate you have. So if you have debt then you
00:03:06.440 | want to tackle that debt based on the level of interest. The lower the interest
00:03:10.520 | rate the lower the debt pay down allocation and vice versa. So for example
00:03:15.560 | let's say you have debt at 6%. Well I think you can allocate 60% of your cash
00:03:22.720 | flow to paying off debt and 40% to investing. If you have 8% interest rate
00:03:29.600 | well 80% debt pay down allocation and 20% investment allocation. Once you get
00:03:36.080 | to 10% I think you've really got to tackle your debt head-on. 10% is a very
00:03:41.480 | very high debt interest rate especially when the 10-year bond yield which is the
00:03:46.040 | risk-free rate of return is at around 0.7% now it got down to about 0.48%
00:03:51.280 | during mid-March 2020 and I believe it's gonna hover below 1% for this
00:03:58.960 | year 2020 next year and beyond. I firmly believe we are in a low interest rate
00:04:04.720 | environment for life. I've been saying that since I started financial seminar
00:04:08.280 | in 2009 and I continue to believe this. People think our interest rates are
00:04:12.280 | gonna skyrocket you got to get a 30-year fixed and pay more because you want to
00:04:17.280 | lock it in for 30 years and so forth. I don't believe that. I don't believe that
00:04:21.440 | because we are a much more efficient world now. So we are learning from what
00:04:27.400 | our mistakes were. We have technology that blasts information in nanoseconds.
00:04:33.400 | We're all interconnected so when globally countries are lowering their
00:04:37.840 | interest rates we must follow suit because of US dollar denominated debt
00:04:43.040 | capital accounts, current accounts and so forth. So we're all interconnected. We've
00:04:47.320 | learned from our mistakes. We're more efficient now and we are able to tackle
00:04:51.520 | inflation much easier as a result. Therefore interest rates should stay low
00:04:56.600 | for longer. Once again if you've got debt interest rate at 10% or higher I would
00:05:02.460 | focus 90% really a hundred percent of paying off that debt. You really
00:05:06.680 | shouldn't have debt that expensive which means automatically pay off all your
00:05:11.920 | credit card debt because the average credit card interest rate is around 16-17%
00:05:16.000 | I mean that's ridiculous folks. Ridiculous. Do not have revolving credit
00:05:20.640 | card debt. Please crush that debt every single month. Be responsible and then
00:05:24.680 | tackle your other debt. Your other debt should not have interest rates that high
00:05:27.360 | including auto loans, mortgage loans and so forth. Personal loans as well. Personal
00:05:32.400 | loans should be below 10% as well. Once again if you are in your rapid wealth
00:05:36.760 | accumulation phase focus on paying off debt and investing at the same time. It's
00:05:42.200 | a logical framework. Go for it. You're gonna feel good about it over the years.
00:05:46.520 | Now if you are at the stage where you are past the rapid wealth accumulation
00:05:51.420 | phase, you're more on the capital preservation phase, then no matter what
00:05:56.240 | the interest rate is I recommend allocating more to paying off debt. I
00:06:00.960 | have never once regretted paying off debt whether that was in 2015 when I
00:06:05.680 | paid off my condo mortgage debt or back in 2008 when I paid off my MBA student
00:06:11.760 | loan debt. That was around $40,000. I've never once regretted it even though I
00:06:16.240 | could have made more money in the stock market. Hey I could have lost money right?
00:06:19.760 | If I didn't pay down $40,000 in debt in 2008 maybe I would have invested that
00:06:24.120 | money in the beginning of 2008 and lost 50%. You just never really know. But
00:06:29.760 | knowing is part of what we all crave for right now especially during a global
00:06:35.760 | pandemic. It's that uncertainty of how many deaths there will be. It's that
00:06:40.800 | uncertainty of going to the grocery store and thinking to yourself, will I
00:06:44.480 | get COVID-19 by just touching the cart? Will I accidentally touch my face or my
00:06:49.920 | nose or my eyes and get the virus? It's the uncertainty of when the lockdown
00:06:54.720 | will end. Will we be trapped at home for another two three months because the
00:07:00.640 | vaccine is not going to be out until 2021 at the earliest? That uncertainty is
00:07:05.520 | what we all crave and paying off your debt and paying off your mortgage is
00:07:10.360 | that certainty that you will achieve and that peace of mind is amazing. I'm
00:07:15.720 | telling you folks it is an unbelievable amount of peace of mind. The other thing
00:07:20.400 | about paying down your mortgage or having no mortgage really is having more
00:07:25.200 | courage. For example in mid-march 2020 when the market was selling off 10% a
00:07:31.840 | day it was nuts. It was crazy. It was scary. I was concerned. What's going on
00:07:38.480 | here? At this rate we're gonna go to zero in like a month. It was just wild wild
00:07:43.920 | wild wild. But having no mortgage gave me the courage this time, unlike in 2008 and
00:07:48.880 | 2009, to actually invest a decent amount of money beyond my 401k normal
00:07:53.840 | contributions into the stock market. On March 18th for example I lobbed about a
00:07:58.480 | hundred hundred ten thousand dollars into multiple tranches in the S&P 500
00:08:02.480 | index. Whereas if I had put down only 20% on my primary residence and carried a
00:08:07.840 | 1.4 million dollar mortgage I highly doubt I would have had the guts to
00:08:13.000 | invest when the market was falling apart. I wouldn't have been able to write a
00:08:18.080 | logical analysis of calculating a stock market bottom in one of those posts that
00:08:23.600 | talked about buying the S&P 500 below 2400. Further if I had had a mortgage on
00:08:29.000 | our primary residence that would have meant I wouldn't have sold about a
00:08:32.000 | million dollars in stock in 2019 to help pay for the house and cash. So definitely
00:08:36.800 | I would not have had the courage to buy maybe more than five thousand ten
00:08:42.160 | thousand dollars worth of stock because I would just be kind of frozen wondering
00:08:45.480 | uh-oh too much leverage too much debt going to downturn not a good idea. But
00:08:51.720 | here's the thing about not having a mortgage or paying down your mortgage
00:08:55.680 | debt. It's not just feeling good sleeping well at night it's not just having the
00:09:00.800 | courage to invest in risk assets when they're detonating. There are other
00:09:04.920 | things that will really benefit from having less debt or no debt. Here are
00:09:10.120 | three easy examples I can think of. One, the courage to quit your job. If you've
00:09:15.000 | got no debt you won't tolerate all the BS at work. If you've got a bad manager
00:09:20.560 | or backstabbing colleagues you'll just say you know what screw you guys I'm
00:09:24.440 | out of here. Well hopefully you do so in a nice way where you negotiate a
00:09:28.560 | severance you get a severance you get $600 more a week in enhanced
00:09:33.120 | unemployment benefits and so forth. Trust me folks when you've got debt you've got
00:09:39.040 | responsibilities and all that it's much harder to quit. Okay two, if you have no
00:09:43.960 | debt you have more courage to start a business. Most people don't want to start
00:09:48.040 | a small business because they don't have an idea, they don't have the funds, they
00:09:51.800 | don't have the time, they fear rejection and so forth. It's just endless excuse
00:09:55.800 | after endless excuse but thanks to the internet the cost to start has gone way
00:09:59.840 | down. Thanks to the pandemic you are locked down you've got nothing else
00:10:03.840 | better to do and you can be on the internet all you want. If you have no
00:10:07.720 | debt and low startup costs then your courage to start goes way up. And then
00:10:12.920 | finally you have the courage to break up. Break up from a bad relationship. Let's
00:10:18.440 | say you're saddled with debt and you have an unstable job despite hating your
00:10:21.960 | partner, despite your partner verbally and maybe physically unfortunately
00:10:25.720 | abusing you, you stay in your loveless relationship for the financial security.
00:10:30.480 | How sad is that? But you know, you know that that is true. It's true among
00:10:37.160 | society because relationships are complicated and money is important. So if
00:10:42.200 | you have no debt and you have your finances in order you can break free
00:10:45.920 | from your relationship and find happiness elsewhere. So in conclusion I
00:10:50.400 | say pay down debt sooner rather than later. You're gonna feel better, you're
00:10:56.520 | gonna gain more courage, you're gonna have much much more flexibility. Thanks
00:11:01.560 | so much everyone for listening. Stay safe, keep tight and if you like this episode
00:11:06.800 | and other episodes I'd appreciate a positive review and feedback. Take care.