Hello everybody, it's Sam from Financial Samurai, and in this episode I want to specifically talk about paying down mortgage debt or investing. It's a favorite topic that definitely generates a lot of opinions and a lot of emotion too for some reason. Debt can help us get wealthier and live a better life, but also debt can ruin us and make us feel not so good, stressed, take jobs that we otherwise wouldn't want because we have to pay off this debt.

I think most of us take on a mortgage because we simply cannot afford to buy a home in cash. We just want to live larger than we can really afford, but thanks to innovation of the financial services industry, we're able to take on different types of mortgages, ARMs, which are my favorite, 15-year fixed mortgages looking the best right now in terms of what you're seeing on the averages for the 30-year, 15-year, and ARMs.

Then of course, the 30-year fixed mortgage where I don't think anybody should really take because the average duration someone lives in a home is about 9 to 10 years. In other words, in 9 to 10 years, the home is sold or the mortgage is paid off somehow somewhere. Therefore, it doesn't make sense to take out a longer term duration loan at a higher rate.

It's an unnecessary expense in my opinion. Further, interest rates have been coming down for over 35 years now. What makes you think interest rates are suddenly going to shoot back up now that we have technology, information efficiency, experience managing inflation and unemployment in previous cycles, and a coordinated Federal Reserve, international coordination of central banks around the world?

Interest rates are not going to be rocketing higher anytime soon, I don't think in our lifetimes, therefore, you want to try to at least match the fixed rate duration to the time you plan to own the home or keep the mortgage. Given mortgage rates have collapsed since the start of the pandemic, it's very logical to see demand for real estate go up and refinancing going up and mortgages being held on for a longer duration of time.

If you've got a 2.5% mortgage or lower, it's hard to get really motivated to pay it off because when you compare it to, let's say, the S&P 500 dividend yield at around 1.8%, maybe it's 1.6% now, that spread is not very high. But if you compare it to the 10-year bond yield, which is at around 1 to 1.2%, a 2.5% mortgage is more than twice that.

Investing is relative in finance. We're all trying to figure out how to best maximize and utilize our capital. Since we don't have endless amount of money like Elon Musk, we always have to decide, do we put that $1 to paying down debt or do we put that $1 to investing?

And I did talk about creating a system called the Financial Samurai Debt and Investment Ratio. It helps you pay down debt or invest based on what the interest rate is. So for example, if the interest rate is at 3%, I think you use 30% of your free cash flow to pay down debt.

If the interest rate is at 8%, you would spend 80%. So it's whatever the interest rate is times 10%. And if you have interest rate above 10%, you spend all of your free cash flow paying down debt because that is a really great return on any investment 10% or higher.

So I want to share with you what I think is the biggest downside to paying off debt. And the biggest downside is losing a tremendous amount of motivation to hustle, to work hard, and to grow your wealth once your debt is paid off, once that mortgage is paid off.

If you think about it, once you don't have a mortgage, living is pretty cheap, right? You've got your property taxes, your insurance, your normal maintenance expenses, but they're not that great. Food is relatively cheap in America. That's why most of us eat a lot of food and are larger than we should be.

There's plenty of free or cheap entertainment. You know, Netflix is like $15 a month for like the high-end package. You can just get entertained for countless of hours. You can go walk in the park, you can play tennis, hit softballs, whatever it is. Life is pretty manageable once you don't have a mortgage.

And so when you don't have that mortgage, any rational person will think, "Well, why bother working so hard at work? Why bother trying to get a raise and a promotion? Why bother trying to start a side hustle or risk a lot of money and time and heartache starting a business?" Now, of course, everybody has different levels of motivation, different engines, if you will, of motivation.

Some of you are just inherently motivated all the darn time, which is great, which is probably why you're probably going to do pretty well. For me, I had a lot of motivation growing up because I grew around a lot of poverty living in Zambia and Malaysia and also Taiwan.

But it was really Malaysia and going to visit India and China in the '90s and the early 2000s that really motivated me to try to make more money so I wouldn't fall into poverty. And just seeing the world, seeing how much poverty out there is really a fantastic motivator to work hard and not take your life in America or whatever developed country you're listening to this podcast from for granted.

I definitely plan to take my kids to a developing country and to live simply at least for a summer or two and just see, "Look, life isn't as great as America or how we live everywhere in the world. Don't take your parents, your house, your friends, your environment for granted." I mean, if you go to India, even right now, the pollution is terrible.

Same thing in China. And you come to most places in America and we can breathe amazing fresh air. However, over time, that motivation tends to fade if you are making more money, saving more money and building your wealth. I think it's really natural to start losing that desire to stay back two hours after your boss leaves to try to help the firm and help the colleagues and to try to get paid and promoted.

That hunger just fades. I remember back in, it was like 2014 and 2015, I was doing some part-time consulting. One was for Personal Capital, the app that I've been using and recommending on Financial Samurai since 2012. I thought that was pretty cool, consulting in the marketing department at a series, I think it was a series C company at that time.

And then I decided, "You know what? In 2015, I'm going to pay off my mortgage. I've had this rental property mortgage since 2003 and I just don't want it anymore." There was about $91,000 left on the mortgage. So I said, "I'm going to try to make more money in 2015 so I can pay off the mortgage that year with new active income, not passive income." So what did I do?

I decided to find two more consulting gigs. So for three months in a row, three months in a row, I had three consulting gigs. I was working about 60 hours a week and I think I was making about $30,000 to $33,000 a month. And that's a lot of money.

That was a lot of money, but I was motivated. I was hungry to pay down that mortgage. And then guess what? As soon as I paid down that mortgage in 2015, I dropped my consulting gigs. I didn't look for new ones. I also decided to go traveling internationally with my wife for weeks.

Then I went to the US Open, the tennis open in New York City for a couple of weeks. I just basically kicked back. I was tired. It was kind of like the day or the month really after studying hard for a final exam. All my motivation to make extra money went away because there was no more mortgage.

Not only was there no more mortgage, it also meant that the rental income that I was receiving at the time, more of it went into my pocket. So I had more cashflow. In a way, it's kind of like a double whammy against motivation. One, I have no more mortgage and two, I have higher cashflow.

So when you have both of these things, you naturally just relax and you say, "Hey, life is pretty easy now, folks. Let's just go slack off and do whatever it is you want to do." Now in early 2019, I was able to buy a house with cash, so no mortgage.

And because of that, I really took my sweet time cleaning up the house to prepare it to find new renters. And I even rejected completely qualified renters who were going to pay $150 more a month because I just didn't get a great feeling about them. I wanted to find the ultimate tenants and hopefully I have, but I won't know for sure for one or two years down the road.

But because of this, because of the lack of mortgage, I gave up $2,500 or a little bit more over the course of the year because I didn't hustle as hard as I would have if I did have a mortgage. So if you're thinking about paying down your mortgage, I would follow the FSDR methodology.

My mortgage now for my primary residence is at 2.125%. Therefore I'm going to use about 20%, 21% of my cash flow each month to pay down some of my mortgage. And I'm going to use 79 to 80% of my cash flow to basically invest in stocks and new real estate.

I'm always on the outlook because I think 2021, 2022 are going to be rebound years, so there's going to be opportunity. But it's important for all of us to try to forecast when we no longer have the desire to do anything, to do anything that makes money, to do anything productive.

We just want to really kick back, play golf, sit on the beach, do nothing and live the good life. And so you've got to forecast when that'll be. I think we're all probably going to do a little bit of something, but we're trying to forecast when the majority of our motivation will dissipate for making money.

And so when that date is set, that is when I think you should be mortgage free. The matching of that timeline is a little bit tricky. That's why we should always try to be investing and paying off debt as we go. My motivation to get my finances right and to protect my capital and to continue growing passive income is still there.

And the reason why it's still there is because I have two young kids. And so each kid, funny enough, feels like a mortgage. They provide me a lot of motivation. So I'd love to hear from you guys. What do you think about the biggest downside of paying off your mortgage?

Since our personal capital, our own human capital is generally what makes us the most amount of money. Doesn't it make sense that once you have an easy life and you don't have any mortgage debt, that you would naturally take a step back? I'd love to know what are your motivations?

What keeps your engine humming to wake up at 5 a.m., to work harder than your peers, to start a side hustle? What is that motivating factor? Because I've been asking a lot of entrepreneurs and people who make a decent amount of money and probably have great net worths, what drives them?

Because I'm personally struggling with figuring out why bother trying so hard now. There's always an endless amount of money to make. Once you think you're going to be happy making 100 grand, 250, 500, whatever it is, once you get there, you're going to realize, "Hmm, why not just try to make more?" It's one of those never-ending traps that I tried to get out of in 2012, leaving the finance industry.

I just didn't care anymore. The problem is I'm feeling a little bit like this again online. There's an endless amount of money to make online as well. I just am trying to find how much is enough and how you all, if you guys can provide me some feedback, how did you find you're enough?

Or is it impossible to find it? Are you never going to be satisfied? All right, that wraps things up for this episode. If you like the episode, I'd appreciate a positive review and some nice comments. Until next time, I'll talk to you guys later.