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Or should I invest first? And how do I figure out the answer to that question? Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. Today is Tuesday, November 4, 2014. This is episode 95 of the show and today is an interview with Joe, aka Rebel Spy, one of the lead moderators in the Money Mustache Forum.

We're going to continue our early retirement FAQ series and talk about whether I should invest first or pay off debt first. It's a pretty good conversation. Joe and I are excited to bring you this show today. We've recorded this previously, so you'll hear the recording. This is one of the most common questions that practically just about anybody has.

Especially it's common in the space where people are paying attention to their money and they're focusing on their money and they're trying to figure out, "What should I be doing? What should I be doing first?" This is a big question. Unlike what maybe you might believe, it's not necessarily a simple answer.

I think you'll find that out in today's show. There are a lot of different aspects that really, for a comprehensive discussion of it, really should be considered. This is a continuation of the early retirement FAQ series that I'm recording with Joe. The first one that we did was episode 78, which was the question of, "Should I invest in real estate or in stocks to fund my early retirement plans?" If you're interested in that show, go to RadicalPersonalFinance.com/78 and you'll be able to listen to that show.

This show is fairly wide-ranging. It's got a lot of in-depth content for you. I'll be back at the end to give you some closing thoughts. Enjoy the discussion with Joe. Joe, welcome back to the Radical Personal Finance podcast. Thank you, Joshua. Glad to be here. This is actually appearance number two.

I think you are the second repeat guest on the show. I was just about to say you're the first, and then I remembered that our mutual friend, the tech mashuganov, also from the Money Mustache forums, was on twice as well. You're the second repeat guest on the show, but I have a feeling you'll quickly rise as we continue working our way down the list of early retirement FAQs.

You're going to rise and be the number one appearances-wise guest on the show. Welcome back. Thank you. I think only him and I are long-winded enough to have multiple episodes so far. Very cool. Last time we talked about should I use real estate or stocks as a vehicle for building my wealth as being one of the most common questions that people would ask on the early retirement forums.

What I'd like to tackle today is I'd like to tackle one of the questions I see constantly, which is should I choose to pay off my debt first or should I choose to invest first? There are various permutations of this question. One would be should I pay off the mortgage on my house before I invest or should I invest first and then pay off the mortgage on my house?

Should I pay off my student loans or should I invest in my 401(k)? There are all these permutations, but we can boil them all down to should I pay off debt or invest? I've got some thoughts on it, but what I'd like you to do is, since you have seen this question a gazillion times, what is the thinking process that you go through when you're answering somebody's question on this topic?

It's a great question. It's a topic, like you mentioned, I've seen it a million times. It comes up over and over. I think the reason why it comes up so frequently is because it's not necessarily a clear black or white answer. I think just like when we discussed real estate before, we didn't necessarily come to a conclusion, but hopefully give people things to think about.

It'll be much the same with this question. I think when someone is trying to figure out should they pay off a particular debt or should they invest, they'll want to look at a number of factors. Primarily, in my mind, the two main factors are what is the interest rate of the debt in question and what type of debt is it?

Both of those will have a large impact on your answer. Let's start with the interest rate because that's the easier one. If it's a high interest rate on your debt, usually you'll want to pay off that debt first. The reason being is because that's a guaranteed interest rate. When you have a debt at, say, 7%, say it's a student loan at 7%, and you pay down that debt, you've got a chunk of money.

You get a bonus at work, and you've got a chunk of money, and you're like, "Should I stick this into some sort of investment vehicle? Should I pay down that debt?" When you pay down that debt, you are saving yourself paying that 7% on that debt. In essence, on that money, you are earning 7%.

It'd be the same as if you stuck that chunk of money into an investment vehicle that earned 7% and then used that earnings to pay down the debt. It'd be a wash at that point. But unless you can guarantee you're going to get 7% somewhere, and that's after tax, so you'd need to theoretically earn even more than that.

By paying down that debt at 7%, you're getting that guaranteed return. The first thing you want to look at is what's the interest rate of this debt? Is it quite high? How does it compare to what I think I could get investing that money? I'd like to start just by saying that mathematically, this is always the answer.

We've got to adjust that a little bit going forward because a guaranteed rate of return is nothing near the same as a potential rate of return. But mathematically, you will always choose whatever is the highest interest rate because mathematically, that will always be the proper thing to do. If we're using math to guide our decisions, which we're not always, that's always going to be the solution.

If you could figure out some kind of reasonable cash management strategy that didn't require you to keep money in checking accounts, that didn't require you to keep currency in your house or anything like that, then the answer would always be that we would never keep money in something that is returning a lower rate of return.

We would always put it towards whatever could be a higher rate of return. That means we would never keep any kind of emergency fund. We'd never keep any currency on hand if we had a mortgage or if we had a credit card payment or anything like that. Practically, you can't actually apply it, but I do just want to start with that.

If you could, then theoretically, that would always be the right move. We don't live in a world of theory. We live in a world of reality. But theoretically, that's always mathematically going to be the right move. Absolutely. And the tricky part comes in when you're making projections, because the amount of uncertainty around the future makes it difficult to say, "Well, this is what I'm going to get for my investments." Theoretically, you are probably investing in something volatile or something with an unknown rate of return.

But if that's not the case, if you are more conservative in terms of your investments, and you don't want to take on a lot of risk or volatility, and so you're investing in, say, a CD earning 2%, and your mortgage is at 3.5%, then you should absolutely pay down your mortgage.

Because it goes back to what you were saying. Mathematically, you want to compare the rate of return to the rate of the debt. And whichever is higher, you would put your money in there if all else was equal. And it never has, and we'll get into some of those caveats when it's not.

But if all else was equal, and you could just look at the math, you'd want to go, "Okay, I'm investing in this thing that's returning lower than my debt. I should pay down the debt." Or, "I'm investing in this thing that is returning more than my debt after taxes.

I should invest in that other vehicle." So that's kind of the basic, straight idea of when you compare. It becomes more difficult, naturally, at sort of edge cases where the return seems similar. Like, if you think, "Well, my mortgage is 4% to 5%, and I think the stock market's going to return around 6%, 7%," but then after taxes or after inflation, and you're going, "Oh, the numbers are real similar.

How do I decide which is going to be best for me?" And so there's a couple things to consider in that circumstance. First, your job, or your monthly cash flow. How are you servicing that debt? Because if you are in a situation where your cash flow every month is a little more volatile, perhaps you are self-employed and your income varies month to month, or perhaps you are in an industry that has recently gone through lots of layoffs, and you're worried about the security of your job, or perhaps you're nearing financial independence, early retirement, and you're going to start drawing down on some assets, and you're trying to figure out what your monthly cash flow is going to look like.

It might be advantageous to pay down that debt to help increase your monthly cash flow, to help when you suddenly get laid off from your job. Let's say you've got a mortgage that was originally $250,000, and now it's down to $50,000, and you get a bonus, and you're saying, "Should I pay off the last of this?

It's at a pretty low interest rate, or should I invest it?" And you go ahead and you invest it, and then you get laid off. Well, it'd be pretty nice not to have that mortgage payment once you don't have a job. And so, especially when you get close to paying off a debt, it's worth considering, "Should I just finish it off to improve my monthly cash flow?" So that's kind of one of those edge cases I mentioned a little bit ago.

And there's an intuitive reason for it. A, so we have basically a--I don't know what it would be. We'd call it a law, but for the purpose of this conversation, we'll call it a law. We have a law of investment that investors are always going to put their money--in a rational world, they're going to put their money into whatever is the best investment.

And if you are going to get a higher rate of return, the person who is willing to offer a higher rate of return on the potential business or investment opportunity is only going to do so if there's a shortage of attracting funds. So if there's a shortage of attracting funds, it's going to come from the perception of safety, and it's going to be more volatile.

So in essence, people talk about risk/return--the higher the risk, the higher the potential rate of return. It's very important to couch the conversation in light of, yes, it is possible to lose money. You can lose money in a risky investment. That's why it's called a risky investment, and it's also going to be volatile.

But you can also flip that equation on its head and say that volatility is the price that you pay for return. So volatility may dramatically affect cash flows, and I'm getting pretty technical here, which maybe I shouldn't, but the volatility of an investment will affect cash flows. So in the example that you said of, let's say I'm paying this mortgage payment, and I've got $50,000 left, and it's a fairly short-term payment.

If you're looking at what should I do with this $50,000 bonus that I have, it may be very advantageous to go ahead and make that investment--excuse me--and invest it into paying down the mortgage because it removes the cash flows, which is as good as cash flows in the immediate short term.

And because it removes the need for the cash flows, that's an awesome--you could never get that with a volatile outside investment. Now if you flipped it and said, "I've got $50,000, and I still owe $250,000 on my mortgage," paying the $50,000 toward the mortgage is not going to do anything in the practical world for your need for cash flow because you still have the mortgage payment.

You've just shortened it on the back end. And so even though it affects your balance sheet, and you would still need to look mathematically at what's going to be my highest rate of return, it's going to be less compelling because you still owe $200,000. So whether you owe $200,000 or $250,000, that's a 20% difference in math on top of my head.

That's not as big of a difference as owing $50,000 or owing $0. So you've got to look at the actual situation. And to find an investment, if you had the mortgage at 5% and you had an investment opportunity at 5%, to have the investment opportunity that's going to return that guaranteed set of cash flows in the next 24 months from paying off the mortgage early, that's a powerful investment, and it often doesn't exist.

Whereas--and that's basically the point I'm trying to make--is that if you were looking at it over a 15-year period, then it might exist. That would be more powerful than the mortgage. So you've got to look at the relevance of the actual situation. Definitely. And that goes back to what I was referring to earlier, the type of debt.

And so a mortgage that's a fixed interest rate, long-term, 30 years, and it's got 20, 25 years left, is a very different type of debt than credit card debt, obviously at a much higher interest rate, or than something like a mortgage that's at an adjustable rate, an arm mortgage.

Right. And so if you've got a mortgage that's going to be adjusting its rate within the next few years, you might weight that a little more in terms of your consideration of paying this off, because now there's some risk in that debt, some risk in not paying it off and having the interest rate adjust upwards.

Right. Absolutely. So definitely consider what is the interest rate of the mortgage. Consider what is your personal situation in terms of cash flow. Another thing that's going to be very personal between investors is emotion. And there's a lot of emotion around debt. There's a lot of people who absolutely just can't stand the idea of debt.

A lot of people who initially struggled with debt, perhaps, in their life, and then came across something like Dave Ramsey and really bought into the idea of the borrower being the slave to the lender and don't want any form of debt in their life. And so beyond the numbers, there are a lot of people who get a lot of psychological satisfaction out of being debt free and owning a home free and clear.

A lot of people who express when they have paid off their personal residence a very freeing feeling. And so it's worth knowing and understanding your personality and how you feel about debt. For me personally, it's very much a tool. And as we talked about on the last real estate show, leverage can be a great tool in real estate.

I've got mortgages on multiple properties, but I also own some properties free and clear. So it's a tool I use when it makes sense. But lots of people don't like that tool because it is a double-edged sword. And there are risks associated with having debt. So that kind of emotional factor, being able to sleep at night is always the most important thing to consider for me.

And so if you're the type of person who just loathes debt and is going to be so much happier without the debt, then if you're paying down debt that's only at 3% when you could be investing at 7%, go for it. If that's something that's important to you. If on the other hand, I'm the opposite in that it would bother me to be paying down low-interest debt and leaving money on the table, if you follow me.

If I can invest that money and earn a much higher rate than paying down mortgages at 4%, if I could earn 12% on that in a particular real estate investment, or if I think I can earn even 7% or 8% long-term just investing in index funds, it would bother me to think about all the money I'm leaving on the table over the next 30 years by paying down that debt early.

So that's definitely something to consider is your personality type and feelings towards debt itself. I think this is an entirely 100% valid consideration. The mistake I think that many people try to make is they try to make all discussions be entirely mathematically focused. There are some people who mathematical focus make works for them, and there's other people who are not very mathematically inclined.

I think it's entirely valid to adjust. Maybe we should make up a metric of some sort called the perceived interest rate that I have on my debt. So even though my mortgage might be at 3.75%, I'll tell you, my wife perceives it as a much higher percentage rate of return, because she's not as mathematically inclined as I am.

So maybe we should make up a factor to adjust the actual interest rate. So you can say, am I going to get more personal satisfaction from paying off this interest that bothers me, or am I going to get more satisfaction from finding the loophole and exploiting the mathematical arbitrage opportunity?

Yeah, yeah. I don't know how you do something like that, but there's definitely other things to take into consideration besides just the numbers. And I think also there is—I forget the name of the concept, but there's something, whether it's mathematics, but I'll make up the name that comes to mind for me is basically there's almost a marginal utility of a dollar, and that it is entirely valid.

You don't go through your whole life. I would consider it a little bit strange. In fact, we may have talked about this on the real estate show that we did. I had a client that what struck me is that he seemed addicted to the art of the deal, but he never seemed to—like every additional property that he acquired seemed to just—like he seemed to keep acquiring.

He never paid down the mortgages. He seemed like he was always getting a little bit of money out here, a little bit of money out there. And the guy owned like 50, 60, 70 properties, something like that. And maybe somebody needs 300 properties to hit their financial goals, but that's not what he said.

His financial goals were modest. He just seemed to always be acquiring more. But when I looked at his lifestyle, I observed that he didn't need more properties. What probably would have been more valuable to him was just a stable source of cash flow. So early on in life, when you are really trying to maybe build a financial independence plan, then it may be very important for you to hustle for every extra incremental percentage rate of return.

And you're going to arbitrage your interest rate here against that, and you're going to always look for what's the highest rate of return. But then as time goes on, as you get older, the money becomes less useful to you. Now, it may still be useful to you in the context of, "I'm going to leave it to my heirs, so therefore I want to leave them a massive fortune." That's valid.

But to you, it's much less useful. A million dollars to you at 20 years old is far more valuable than is a million dollars at 99 years old. That's the point that I'm trying to make. And so there seems to be a natural progression in one's financial plan as we grow over time, where we don't need to— the extra rate of return is less valuable than is the extra margin of safety or the extra emotional peace or the extra relaxation, the ability to lower the amount of work that I have to do to eke out this rate of return.

It's a valid concept, I think. I 100% agree. And I do think, well, there's a reason most asset allocations get more conservative as you age. And that would be the same as this scenario. If your asset allocation is getting more conservative and you're going from 80% equities and 20% bonds to maybe down to 60/40 or 40/60, and you're getting more bonds in your portfolio, you're getting less stocks, you can think of paying off this debt as a fixed-rate bond.

And so as you age, it makes more sense to pay off that debt for the security. And that actually brings me to the exact thing I was going to say next, which was age. And not necessarily for that reason, though it is a very good one. What I was thinking is when you are younger, you have more time to ride out bad times.

You have more time to make up lost ground if you kind of choose wrong. And so if you are young and you pay down that debt, you've sort of capped your upside in terms of I only can earn as much on that money as the interest rate of that debt.

Whereas if you take that money you would be paying it down with and invest it, you've got the complete upside of however much that grows in the next 20 or 30 years or however long you have. But you do have the potential downside of maybe it underperforms what that debt would be.

But since you're so young, you sort of have the time for that to play out and not have that potential downside hurt you too bad. So it may be worth, if you're younger, considering holding debt for more than you would otherwise. You also, when you're younger, you make a good point and another maybe offshoot of that same point you're making.

You also have more time when you're younger to enjoy the financial benefits of leverage. So this would be why, so I'll use probably the example that might be the most intuitive to a listener is we often will encourage a young person to go into debt for the purchase of a college certificate, a college degree.

So they say go and get student loans. Well, why? Because we're saying that if you graduate at 22 years old and you have this college certificate, then that allows you to command a higher wage in the marketplace. So therefore, yes, you're going into debt, but that's supposed to pay off for you over the course of a long period of a career.

So we know this intuitively using that example. We would think maybe a little differently to if we were instructing the 50-year-old person that said I'm thinking about going and borrowing student loans to go for a 10-year career. You say, well, are you really going to enjoy the benefit of the leverage?

So this could be applied in every aspect of life. So if a young person can use that debt as leverage to increase their rate of return, when looking forward over a long investment time horizon, they have much more time to enjoy the benefits created by that leverage than does someone who is older.

And I think it's important to recognize the math behind that is that you have more time to recover from a mistake and you also have more time to enjoy the upside. So therefore, the potential is really much more valuable. That's a really good point, and let me give you a concrete example of that, of using that leverage.

So I was listening to one of your earlier podcasts this afternoon on my bike ride home, and it was an interview with Craig from Create My Independence. And I don't remember the episode number, but you can link in the show notes. And one thing Craig did before he quit his job was he saved up five years of living expenses so that he could then comfortably quit his job, understand that he may not have any income for the first year or two of his kind of entrepreneurship exploration, but he could live off of that.

Now, I don't think – in fact, I know Craig didn't have any debt at that point because kind of the start of his story was how he paid off a bunch of debt first. But that would be a good circumstance in which even if you had debt, if you're planning to launch yourself into some sort of self-employed entrepreneurship, saving up that money for living expenses rather than paying down the debt could be a good idea.

You're essentially by not paying off that debt, you're utilizing that debt, which is already in place, as leverage for your new opportunity. Right. I think this would be – it's a good example. And I think it would be – this would be a good time to bring in the different types of debt.

I struggled with this because for a time I believed in the idea when I was younger of good debt versus bad debt, and then I kind of swallowed the Dave Ramsey idea of there's no good debt. And then I've since come back to the idea of there is a very big difference between certain types of debt, and I had to kind of rethink the whole process myself.

And there is a major difference in terms of choosing to pay down debt, first of all, on the structure of the debt as regards the actual interest rate that you're paying. And so this was the first point that you made going back to how do we figure out the actual interest rate.

We need to factor in the deductibility of the interest, what our tax – what is the actual tax rate? Is this a deductible type form of debt? For example, all business debt is 100 percent deductible because it's deductible against the profits of the business, whereas all personal consumption debt, none of it is ever deductible.

And then you have the kind of crossover debt of student loan and mortgage debt where that may or may not be deductible depending on the structure of the debt and then the structure of your specific tax circumstances. But we need to factor that in first in terms of the actual rate of – the actual interest rate that we're paying.

But we also need to figure out when we're thinking about should I pay off debt or invest, we get into the whole question of was – of our behavior. Is this consumption debt that was just purely we bought a bunch of stuff? In that case, maybe the decision is not should we pay off the debt or invest.

Rather, should we sell the car that we borrowed a bunch of money on so that we can have money to buy some investments? In that case, that may be the fastest way to pay off the debt. So you can never make the case to me that it's better to go into debt to buy a car instead of investing.

My point is not shaping up like I wanted it to. There's a major difference between what the use of the money is. You've got to look at where you are in the cycle of your wealth-building stage. You may be just starting and you may be trying to change consumption habits.

In that case, maybe the primary focus is I need to change my consumption habits so I'm going to get rid of some of this consumer debt. But if you move into a world where you owe a certain amount of money on a business debt, then you're going to be looking at that.

That's not consumption debt. It's a very different type of debt, investment debt versus consumption debt. That's got to be factored into the plan. Let me offer a different viewpoint because I know you enjoy when people maybe disagree. I love different viewpoints. I would argue it doesn't matter where the debt came from in terms of deciding whether or not to pay it off.

You're absolutely right that you should look at where debt came from in terms of, "Hey, I may need to change my lifestyle." If you're racking up all this consumer debt, you may want to look at why you're spending it that way. When you're doing your monthly cash flow statements, when you're calculating your net worth and you see, "Uh-oh, my net worth dropped.

Why is that?" You look into it and you say, "Oh, well, I took on some business debt." You might say, "Okay, I'm okay with that," versus, "I bought a new speedboat and I couldn't really afford it. Uh-oh, maybe I need to change something." I do think you should look at where the debt came from in terms of, "Do I need to be worried about my life choices and how those will affect my future?" But in terms of paying off the debt, I'm not sure that it matters where it came from.

I'm glad you brought the point up. I don't disagree with you. In fact, I got a little lost in the last response as far as the point I was trying to make, and I think it came through to the audience. That's on my list, actually, where I was going to go next, but let's explore that.

I struggle with how to advise people, and this is where the area of general advice, I don't see any way to give general advice in this area. It's got to be specific to the person. Where the debt came from does not matter at any point in time because if you woke up – I'll pick on you as the example.

If you woke up and I piled $200,000 of debt on you, my guess from our last conversation and knowing how you think, which is a very kind of mathematically-minded person, you would not change anything except you would say, "Wow, I've got to deal with this $200,000," but you would still keep focusing on your wealth plan.

That's because you have one. But the average American is functionally illiterate when it comes to investing, and so that's why this whole question is so difficult for people. People we don't have as a culture were not taught any skills of investing, so if somebody hasn't developed that yet, then they need to focus on the skills of investing.

It really should not matter. In a world where everybody is rational, it doesn't matter whether you have $60,000 from a boat that you bought and that was a pure consumption toy. You still should just simply be looking at it and saying, "Well, if I have $60,000 in hand, what's going to be my higher – what rate of return do I expect to earn from my investments?" If it's in excess of 6% from this investment option over here, then I'm going to put it there, and it doesn't matter the source of the debt.

But the problem is you deal with, A, that's a very small subset of the population that thinks that way, and I think it is the mathematically correct way, but to use Dave Ramsey's line, if we were doing math, we wouldn't be in credit card debt, right? So he is absolutely right in that, which is the challenge of how to negotiate it.

And then B is that people don't always often have the skills of investing that are hands-on where they're comfortable with it. So I struggle with knowing how to answer, because I think you make a really valid point, but I struggle to know how to coach someone through without knowing all of the details of their situation.

Are they literate when it comes to investing? Do they think this way? Are we trying to address a problem of overspending? Or is this just a fact circumstance? Yeah, that's true. I tend to maybe overestimate people's abilities, but you're right. It is kind of in the real world, people make mistakes all the time.

And actually, to share with you one of my mistakes that popped into my mind a few minutes ago when you were talking about types of debt, and so you were talking about student loans versus credit card debt versus mortgages, and how they're all very different types of debt. Some other things to take into account because of the type of debt is things like student loans cannot be discharged in bankruptcy, whereas consumer debt like credit card debt can't.

And so if, for example, you are in a situation where you're going to be filing bankruptcy, and you have $10,000 that you're going to throw it alone first for, I don't know, for whatever reason, you get a $10,000 inheritance and you want to pay down some of this debt that you're drowning under, and you've got this credit card for $10,000 at 18%, or you've got this student loan at $20,000 at 5%, if you're still in a situation where you're going to be declaring bankruptcy, then it would be silly to pay off that credit card debt of $10,000 and then declare bankruptcy and still have that $20,000 student loan instead of paying down $10,000 of that student loan, so that's only $10,000, and then having the $10,000 of the credit card debt kind of wiped away or renegotiated into some sort of payment process or whatever it is through the type of bankruptcy.

So that's just another point of how you have to look at the type of debt. And what I was going to say is student loans a lot of times will have some sort of special consideration with employers, specifically a lot of times government employers, where they will be paid off or partially paid off or you'll get some sort of benefit towards your student loans after working a certain number of years.

So my wife and I are both teachers, and I stupidly was paying down my student loans, and paying them at the minimum because the interest rate was so great on them, but we went and got our master's degrees and paid for those in cash because we had the money, we were cash-flowing plenty of money, and we're like, "Hey, why take on more debt for this?" And then sure enough, we hit the point where I could apply to get student loans forgiven because I had taught for a certain number of years, and as soon as I finished that school year, you can see where this is going, I had $100 left on that student loan in June.

This was just this past June, actually. I had $100 left, and so I didn't even bother to fill out the paperwork to go through the process to get that $100 forgiven. I mean, it was pointless, obviously, at that point. And so if--and my wife, hers all completely paid off, too.

And so if we had actually taken on debt to--if we had gotten student loans to get our master's degrees, those would still have been in place, and we could have gotten all that forgiven. And now, you know, people might argue the ethics of taking on debt that we know is going to get wiped away.

I would say that that's a benefit of our jobs that we just didn't take advantage of because I wasn't thinking five years ahead at that point, and I was like, "Hey, we'll just pay for these master's degrees, no big deal." But thinking about the type of debt, had I actually sat down and thought--or had someone tell me, like, "No, take on this debt, pay the minimums, and it will be forgiven because that's one of the benefits of working as a teacher in a low-income area," they'll--they want to pay you for your education.

And I unfortunately didn't take advantage of that, but knowing the type of debt is very important to making optimal decisions. I would encourage you and every listener, exploit every single one of those things you can find. They were carefully designed to achieve a certain policy objective by a gang of crooked politicians, so exploit them for your own benefit if you can, and we'll deal with the political stuff at a later date, but exploit every one of those things you can find in the meantime.

You make a good point, and this is where, to me, it's a good illustration of how generalized financial advice just simply doesn't work, because--and this is another reason why the rich get richer and it seems like the poor stay poor--because just a simple knowledge of what debts are deductible versus what debts are not, I cannot possibly fathom why anybody would borrow money that's not deductible.

Like, this makes no sense to me in the world. Knowing all the ways that you can borrow money where it is deductible, like, I just simply don't understand why anybody borrows money that's not deductible. And, you know, if you have a business, every dollar that you borrow in your business or against your investments is entirely 100% deductible, without limit.

So just knowing that right there gives you the knowledge that you need to do to adjust your circumstances, and if you're going to buy a personal car, if you have the choice of investing cash into a business, and this is all assuming-- that's the problem with all of this, is you can't assume that everything is equal, because everything is not equal.

You'll have to look at an individual situation and say, "What sources of cash are available to somebody?" But if I have the choice--let's say I have $30,000 and I'm considering going and buying a car for personal use, or I'm considering starting a business, many people would choose to take their $30,000 and spend their $30,000 on the business and go and buy the car, which is used for personal use and thus is not deductible.

I would say, assuming you can get similar financing terms, borrow the $30,000 for the business and pay cash for the car, because then 100% of your interest cost is deductible against the business, whereas in the personal world, even if you use the car partly for business, only then a portion of the expense is deductible for business.

So always look for a deductible source of debt versus a non-deductible source of debt. And this, I think, is a missing point when people are in the paying down debt. I did a show on this. I'll link to it in the show notes. I don't remember the number of it.

But what always gets me frustrated is the decision of what order to pay down debt is not interest rate is the deal, and it's not which one has the smallest balance or the largest balance. That's not the order. Those are two good factors. But another good factor is bankruptable.

Another good factor is deductible. Another good factor is what's the variability of the interest rate. And there were a couple other factors that I listed off in that. And this stuff really does matter. If I had the choice, if I had $30,000 cash, and let's assume that you've got a small business loan at 4%, and you've got the student loan at 4%, and I can buy a CD that's paying 4%-- I've just created this ideal world that really does never exist.

But I would borrow the money on the debt. I would keep the money and the CD in the bank. And I would keep the student loan at 4% because that might be deductible, depending on the structure. So now I've got fully deductible, bankruptable debt. I've got money sitting in the--oh, excuse me.

I shouldn't have made the student loan or the CD my example. I should have said 401(k) with a guaranteed investment contract of some kind paying 4%. I would put the money in the 401(k) because now it's protected from the claims of creditors and bankruptcy proof. I would pay the minimum payments on the student loans, knowing that I've got something in reserve to pay it off if I have to go through bankruptcy.

I would walk through bankruptcy with the 401(k) and the student loan still, and I could use the money from there to pay it off. And then we would discharge the business debt. Now, I don't want to go and voluntarily put myself in that situation. Don't get me wrong. I'd prefer not to have the debt if I didn't.

But I would certainly prioritize paying a non-bankruptable debt over a bankruptable debt. And I would prioritize paying a non-deductible debt over a deductible debt any time. And I would carefully consider that in exactly the same example that you used. I would carefully consider which of these is advantageous versus what's going to put me in a better place if I have hard times.

Definitely. And so I think the problem people have is that real world is a lot messier than our examples. Absolutely. And so it kind of goes to that earlier when you mentioned if only there was some kind of waiting factor on what the interest rate feels like to you.

We don't really have a waiting factor for this debt is non-dischargeable, so add x percent interest rate to it. And this debt is deductible or not, and so shift it by this. But in terms of the deductibility, that's definitely a number you can calculate. What is the actual kind of effective interest rate after those tax implications and things like that?

But if you've got a debt that is deductible or that is dischargeable in bankruptcy, but it's at 0.5 percent higher, do you then want to pay that down? Well, I guess it depends on how likely you think going bankrupt is. How much sort of exposure do you have to events that might cause your business to go bankrupt?

And so we don't really have a factor to weigh those sort of things. You kind of have to assess your own individual situation. That's why in most situations in the real world, it's usually pretty apparent. It's very unusual that somebody walks in with eight different loans of varying characteristics and seven investment options, all of which have various rates of return to various goals.

Usually it's pretty straightforward. I got a mortgage, I got some credit card debt, and I got a car payment. Okay, what are we going to do? Are you going to invest your way out of this or are you going to pay your debt off? I've never invested before. Okay, do you care about it?

No, I just need my 401(k). Okay, your answer emerges. So in the real world, it's usually pretty simple, but I want people to know about it so that they can make more intelligent decisions. I think we should be looking to adjust, if we can adjust, we should be looking to adjust all of the--always looking to have the most favorable terms to our credit.

You mentioned the effective interest rate. No one even gets that calculation right because usually people just consider the income tax rate. If you have business debt, you need to factor in your income tax rate plus your employment tax rate. So there's another 15% if you're a business owner. I mean, you adjust the interest rate of a debt by 15%.

Maybe it's a big deal, maybe it's not, but 85% of 5% is 4.25%, so that may be a substantial adjustment just based upon employment taxes being owed versus non-employment taxes being owed. So it is hard because you and I--this is kind of an idealized conversation, but hopefully we're giving people some thoughts that they can use to look at their situation and figure out the answer to it.

And your hypothetical guy coming in with seven different debts reminded me of another potential benefit of paying off debts is just kind of simplicity. Right, absolutely. I mean, there is some value in having less payments that you need to keep track of that you might miss in a career overage charges in terms of just less financial documents in your life.

And how much is that worth? Again, there's no really sort of factor where you can go, okay, because the debt's at this, I'm willing to put up with the extra hassle factor. However that is, I don't know, because maybe you set your payment to just auto-pay out of your bank account and you always have a surplus and you never even think about it.

Or maybe it's something that you kind of manually monitor, so it is a little bit more work. But that is something else that might be something someone would take into consideration is, you know, I want to simplify my financial life a little bit. I think that's a brilliant point.

I've got a response for you of another point that goes in a similar way, and this is why it's such a difficult conversation. And this one actually applies to me and to my wife and to me. We mentioned briefly the emotional satisfaction of being debt-free, but I think there's another factor of basically the emotional intensity of a goal.

So right now I owe something like, I don't know, 160, 170,000 bucks. I've got to check my sheet. Somewhere in that range, like $167,000, something on my mortgage. And when I look at that number, I often think about paying it off, but there are two aspects to paying it off that I struggle constantly about what should I do, what should I not do, and thinking this through for myself.

It's at a low fixed rate, 3.75%, deductible interest rate, and it is a bankruptable debt, and it's secured by an asset. So, you know, check, check, check, check. This would be pretty dumb for me to pay off. But here are two factors that I consider a lot. So it would be silly for me to pay it off early.

If I can't beat the mathematical rate of return of a 3.75% mortgage on my home mortgage, and if I can't beat that, mathematically speaking, I've got no business telling anybody about any investment advice, right? Like this is basically a no-brainer. But setting aside the valid emotional satisfaction for me, and especially for my wife, which I think is important, I very seriously often consider laying aside my mathematical perfection in favor of just the comfort and security that it might bring my wife to have the house paid off.

That is valid. But the one I think about is what about the emotional intensity of a goal? If I set the goal and I say, "You know what? My 30th birthday is coming up. I've thought about this. I want to have my mortgage paid off on my 30th birthday." That would give me -- that might light a fire under my butt.

That really would give me the focus to say, "I want to --" you know, and this happened to me in college when I said, "I want to get my student loans paid off before I graduate from college." I had no idea how on earth I could ever possibly do it.

I really didn't think it was possible, but I set the goal, and then I worked like a maniac to hit it. And so I think sometimes about it, and I talk with my wife. I was like, "You know what? If we set that as a goal, I wonder if that would just get my butt in gear, and I would go nuts with work in a way that if I said, 'I have a goal of accumulating an extra $167,000 in my financial independence fund,' that's not that exciting to me." I mean, it's not nearly as exciting as saying, "I paid off my house." How cool would that be?

So how would I account for the emotional intensity of saying, "I paid off my house," as compared to accumulating the extra $167,000 in my financial independence fund? I don't know how to adjust my math formula for that one, because I think it's really valid. Yeah, absolutely, and a lot of people get that sort of focused intensity on – especially when it comes to debt, and especially when it comes to eliminating particular types of debt, whether that's their focus on their credit card debt or they get so excited for their student loans or mortgage, and it sets this kind of goal, and a lot of times a high goal, and really pushes them to overachieve towards it.

And I think that's a great point. However, let me again offer you a devil's advocate opposite viewpoint. While it is more exciting, I also see people who will come on an early retirement forum and post that they paid off their mortgage or paid off all their debts, and everyone congratulates them, but then they say, "Yeah, it's great.

It's a great feeling, but now I'm feeling kind of adrift. I don't have a goal, and I don't – " and so they – ostensibly, you are not going to just pay off your debts and then be like, "I'm done saving forever." You're going to want to continue saving.

You're going to want to either – maybe you're trying to go for financial independence early, or you're saving for retirement at an older age, or whatever your other savings goals are. Probably you have some beyond pay off debt, and if you build up that whole – if you build it up into this big, giant thing of, "I'm going to pay off my mortgage," and then you hit that – It's a letdown.

Where do you go from there? Yeah. And versus if you don't build it up into this big thing, and instead you set your goal to, "I'm going to make $167,000," or, "I'm going to make $500,000," or a million, or whatever, "I need to be financially independent," but I think it's good to have smaller intermediate goals, because sometimes big, giant ones can seem so daunting.

But I also just would caution the listeners to don't overbuild up a goal that's not your final end goal, because there can be that kind of adrift feeling after you accomplish it, like, "What now?" Right. And especially if you've been telling yourself all along, "Yeah, paying off this $167,000 mortgage is great, because I wouldn't feel that great about building up just $167,000.

That would be pretty meaningless." And you've been telling yourself that over and over, and now you pay off the mortgage, and what's your next step? Right. And probably hit that $167,000 in saving at some point, and you've been telling yourself all along that that's not that great of a goal, and now you have to, what, tell yourself the opposite?

That, "No, no, now that is a good goal." It's tough. Isn't it fascinating how influential psychology is on all of this? Yeah. We started out with, "The very first thing you should consider is the math," and then we've spent, I don't know how long now, talking about everything but.

Right. And this is just an illustration of why this is the number one, one of the most frequently asked questions in early retirement forums, because people are struggling with this. And that's one of the things I consider to be most valuable about the early retirement movement, is that the people that have contributed to the early retirement movement have helped people to crystallize financial goals that go beyond paying off debt or hitting arbitrary net worth numbers.

So, by saying, "I need a multiple of spending," this is a practical goal that is achievable. Whereas, "I want to be a millionaire," okay, so what does that mean to you? It either means you don't nearly have near enough money as you need. If you're spending $100,000 a year, having a millionaire doesn't make you financially necessarily independent.

And if you're spending $20,000 a year, it's far more money than you need. So, what is that goal? So, whatever people's goals are, as long as they can be fully integrated in and grasped, and then I do think, you know, I've experienced that myself. Once you reach a certain goal that you always thought, "This is going to be key for me," well, you hit it, and sometimes you're looking for something more.

It is important. I have another factor that I want to throw at you. Sometimes paying off a certain debt will eliminate an expense, and I don't know how to mathematically calculate this one in, but I know it's a factor. So, back to my situation with my mortgage. I live in South Florida, pretty close to the beach, and so my windstorm insurance on my house is absurdly expensive.

And this is an ongoing expense that as long as I have a mortgage, I'm required to maintain windstorm coverage. And I have seriously considered dropping the windstorm coverage. I think I'm... I've seriously considered dropping all of the homeowner's insurance coverage. I think I probably would be comfortable retaining that risk.

It's a little bit theoretical right now, but at least the way... I mean, the way our policies work is that if I just dropped windstorm coverage, then I could still keep the fire coverage and all the rest of the stuff. But if I dropped windstorm, it would save me a massive amount of money, and I've been through enough hurricanes to feel comfortable with what a hurricane is, and to understand that it is possible I could get a direct hit.

But I've also been through enough to recognize the actual probabilities of my personal experience with my house being blown away and how much it costs to fix some shingles. I'm competent when it comes to fixing some hurricane damage, and I could get a direct tornado hit. That's possible. But I'm pretty comfortable kind of with those odds, and I'm comfortable retaining the risk in a worst-case scenario, I think.

So if I could eliminate the mortgage, then I could theoretically eliminate at least a substantial portion of my homeowner's insurance premium, which I may be comfortable doing with regard to the rest of my financial planning. That would make, actually, a massive difference in the actual interest rate of my mortgage, as far as the effective.

If I bring that into the calculation, and I were to calculate my several thousand dollars, I think it's about $4,000 a year windstorm coverage, something like that, that makes a big difference in what would that be? $4,000? A hundred thousand. Yeah. So you factor that in, and now it would adjust it.

And so something like that, there may be other people's situations. That's my situation. But other people may have situations where if I pay off this certain debt, maybe I can cancel a life insurance policy that I'm maintaining on a business partner or something like that. Or if I make this final payment, it frees this up in some sense.

So maybe sometimes there are other considerations. Sure. And just to fill in a gap real quick, in case some of the listeners didn't quite follow that, because you have a mortgage, the bank that holds that mortgage is requiring you to have that wind insurance. Right. And if you cancel it right now, they will get that insurance for you and charge you for it.

That's typically how it works. Whereas if you paid it off, then you could decide, no, I'm not going to have that covered. I will go ahead and get fires covered, but not wind damage. And so just to clarify that, of why you can't cancel it now and have to pay off that mortgage first, is your bank holding the mortgage requires you to have that.

Right. Yeah, definitely. And so there are circumstances where paying off a particular debt has other stuff tied into it. And I think my situation is probably a pretty good example as far as how I've struggled with this myself. Because on the surface, you would look at a situation like mine and say, listen, 3.75% fixed rate mortgage, 30-year loan, you would be an idiot to pay it off.

But if I factor in and I say, well, number one, factor in that insurance savings we just went over, factor in the emotional intensity, if I were to set myself some arbitrary short-term goal that I was willing to sacrifice extra toward, and if I could amp up the intensity of that, factor in the emotional appeal in my marriage and with my wife as far as how great that would make her feel with all of our other financial transactions and financial moves and other investments and things like that.

That would make her feel like we were working from a really solid base because that's important to her. So that would probably improve my marriage. And then you factor in in the state of Florida, I live in a state of Florida, we have an unlimited homestead exemption for creditor protection.

And so my entire value of my house is 100% covered from bankruptcy and from the claims of creditors. So you factor that in, all of those things in, and all of a sudden now, those external adjustments really would dramatically affect that actual 3.75% interest rate in a direction where it feels like a higher rate.

Now, does it feel like 12%? I don't think so. Does it feel like 10%? I don't think so. But it feels higher than 4%. And so you've got to make your own decision based upon... if I can't average 4% in my investments, I would say, "Man, again, I should be doing something else." I would say, you said, "Yeah, if I can't beat 3.75% or 4%, I shouldn't be giving people advice." And someone listening might be like, "Well, he does know what he's doing and he can beat that." And they might be thinking, "I'm not sure I can." But one thing I always mention to people who are looking to early retire and thinking about paying off a debt like this is your presumption generally is that you're going to have a 4% safe withdrawal rate.

That means you are assuming that you will be okay withdrawing 4% or so of your principal, and hopefully the gains will be more than that so you won't actually necessarily be drawing down a bunch of principal. But the idea is you think you can beat 4% just implicitly. You think that by retiring with a 4% safe withdrawal rate.

So then if you're thinking, "Man, I can't beat 3.75%," and you're in the circumstance of then paying down your mortgage at 3.75%, you better be planning on retiring with a much lower safe withdrawal rate, 3% or 2% or whatever. Because otherwise you're having these kind of, I don't know quite what the word I'm looking for, like hypocritical or conflicting, you have these kind of incongruent thoughts where you're saying, "Oh, I can't beat 3.75% so I'm going to pay down this mortgage, but I'm going to go ahead and retire with a 4% safe withdrawal rate." And those don't match.

If you think, "I'm okay to withdraw. I'm a 4% safe withdrawal rate. That's pretty good." You understand that and you go with that, then you absolutely should be keeping your mortgage. Right, right. This has been great, Joe, because I think I made that exact comment in one of these threads over there in the forums.

And it's like if you don't think you can do more than your mortgage, your entire early retirement plan just fell apart. Right. The entire thing is predicated upon the 4%, the entire formula, the way it's often expressed from the perspective of doing it with stocks on a safe withdrawal rate, which we'll cover that in a future show.

But the entire math of 300 times monthly income, 300 times monthly expenses, 25 times annual expenses, that's based on a 4% safe withdrawal rate, which is based upon the historical returns of the indices that were used in the analysis, which are, depending on which index we're talking about and depending on the portfolio, those are averaging 8% to 11%, depending on which one we're talking about.

So the whole thing falls apart there. And then you get in another comment I think I made in one of the threads. It was a thread I think entitled "How Bad Is It for Your Early Retirement Date if You Pay Off Your Mortgage?" And it's the entire concept of risk perception.

It's like, "Oh, I'm going to invest in West Palm Beach, Florida where I'm completely subject to everything in a local area. Do I feel more comfortable having that money in companies that have their assets all around the country and around the world and I can easily diversify with thousands of companies?" Man, for me, the risk perception there is night and day as far as I'm way more comfortable owning small shares of thousands and thousands of companies.

But to people, again, back to the lack of literacy surrounding the topic of investing, to many people, the risk perception that they perceive there is dramatically different in favor of the house. That's another thing that people are always questioning is their perception of the risk. And many people either don't understand or they have different assumptions than I might have, which is also valid.

And here's another giant factor in terms of paying off debt or investing. Why don't you consider that we haven't touched on yet, but that's I think very important. And that's the issue of liquidity. And a lot of people will argue, let's go back to our earlier example of you've got $50,000 and you have a $50,000 mortgage and you're wondering, "Should I invest or should I pay off this mortgage?" And let's say your mortgage payment is $1,000 a month.

And you're in a situation where your job is not necessarily stable. A lot of people initially argue and say, "Well, if you pay off that mortgage, you won't have that $1,000 payment. You'll still have the taxes and insurance part of it, but you won't have the principal and interest.

And so if you do lose your job, you won't have that payment. Your cash flow is looking a lot better." But on the other hand, what you've just done is taken that $50,000 and tied it all up into this illiquid asset. And if it gets to a point where you can't find a new job or where you need to move and relocate for your new job or whatever, it's very hard to access that cash.

It's expensive to sell real estate. There's high transaction costs. It takes a while to sell real estate. Versus if you had that $50,000 and you had invested it, and you needed to access that money right away. Invested it into a non-real estate investment. Right, absolutely. A liquid investment. Yeah, something to bonds or whatever.

CDs that you can break with a fairly minor penalty. Something more liquid. You have access to that money right away. And for me, if I lost my job, I would rather have $50,000 in the bank. Even having that $1,000 a month payment. Because I know I've got 50 of those payments in the bank right now.

That's over four years of mortgage payments. So it's like people are like, "Oh, but you get rid of that debt for your cash flow." And it's like, "Yeah, but I could just pay that every single month for the next four years." I mean, that to me is essentially like almost not having that debt.

But you also have that other big chunk of cash should you need it. And so when you are paying off debt, that's one thing to consider. Especially, we're assuming you can reaccess it in terms of eventually selling a house or whatever. But if it's student loan debt, let's say you've got $20,000 in student loan debt and $20,000 cash.

As soon as you paid that student loan debt off, you can't reaccess those funds. The debt's gone and there's no way to gain access to that leverage again. And so if you've got $25,000 in the bank and you go, "Okay, I'm going to pay off these student loans for $20,000." And that leaves you with $5,000.

And then you lose your job. Suddenly you're down to $5,000. And that may last you only a month or two. That's super important. I just gave that same advice to a friend of mine recently. And he was aggressively paying down his mortgage, was considering starting a business, kind of going out on his own.

And I said, "Sounds awesome." And he's very short-term left on his mortgage. And I said, "One thing you might consider though is if you have even an inkling of starting a business, quit paying off the mortgage, man. Because it is going to mean so much more for you to have an extra $50,000, $100,000 in cash as far as your cushion and your comfort level than it will be to have a paid-up-for house." Because even--again, back to the psychology--let's assume that you can go and access that money in the house with a favorably termed HELOC.

And you can deduct the interest because you didn't infer a mortgage. Great. I'd still rather have the cash just psychologically in that situation. Now, you can always skin the deductibility cat in various ways. But I mean cash gives you margin. And the key thing is that all financial planning ultimately really comes down to cash flow.

The only reason we pay attention to net worth is because net worth influences cash flow. But net worth is a meaningless number. You can't necessarily spend net worth. But you can spend cash flow. So cash flow is really, really valuable when you're thinking of--like you mentioned, Craig's example. I've got five years of expenses.

That gives me five years to figure out my new business. That's valuable. Absolutely. And I just totally lost what I was going to say. So I've got one more I've been wanting to mention. And then I'll give you a chance to mention anything that we haven't hit on your list.

And then we'll wrap up because we're over an hour here. What? Time flies, right? We thought we would get all these topics in one show. So I think that there's another factor. And the factor is an honest assessment of your situation in terms of scale. I just got an email from a listener, and this listener asked me and said, "Joshua, I've got $200,000 of student loan debt, and I don't know what to do." He said, "It's a lot of money, and I don't know what I should be focusing on.

Should I be paying it off or not?" And I don't know any more circumstances than that. I just--the email came in. I read it on my phone, and that was it. But it was right--it was two hours before we were recording this show. And my inclination is to say to some people, "Sometimes you've got to think about the scale." And maybe you're in a situation where you can be frugal and you can frugal your way out of debt.

Frugality is important no matter what. But some situations, you just can't frugal your way out of debt. And I'll use the cultural anecdote that many of us know of what Donald Trump being a billion dollars in debt, if I remember his story right. You don't save your way out of a billion dollars of debt.

You've got no choice except to invest your way out of it. And this goes back to your point, which I think is accurate, that to you it doesn't matter what the source of the debt is. A credit card debt is functionally the same as "good debt" on a second mortgage.

Now, it's not the same with regard to terms or rates, but it is the same in your mind as far as there's no emotional difference. Sometimes you've got to look at your situation and say, "I cannot save my way out of this debt." I struggle sometimes when I see people working their way through these long, involved-- "I'm going to save my way out for the next 12 years to pay off this debt." And I just look at it and say, "You've got to do something drastic." Sometimes you've got to go and roll the dice on your new business idea.

Or you've got to go and maybe you've got to go into more debt so you can get this certification that you need that's going to dramatically increase your income. I don't know, but you can't always just pay it off little by little and focus on paying down the debt.

Sometimes you actually have to say, "I've got to invest my way out. I've got to grow something big, because there's no way for me to get these numbers licked with just what I've been doing." What do you think? That's interesting. I think I would have to think about that.

I don't know how I feel about that, because I-- Because you don't care how much debt. No, I hesitate to tell people who are already facing what feels like an insurmountable amount of debt to them to go take on more risk and potentially a lot more debt. What I would almost advise them--and this is just completely off the cuff--is to follow something similar to your advice in your show about the Walmart worker, how I would become a millionaire on a minimum wage show.

It was all about, "You're not going to get there at minimum wage." So here's the steps you can do to improve your situation so you can get into a situation where you are making enough money to then become a millionaire in that episode. In this case, it would be, "Here's how you can get yourself into a situation so that you can pay off that $200,000 in debt." I guess for some, it might look like starting a business, but it's hard for me to tell people, "Go take on more debt to start a business," just because I think about how often businesses fail.

Absolutely. That's a tough situation to be in, to basically be saying, "I have to make this business work," versus someone like Craig, who we've now talked about several times, who saved up five years of savings. He had that cushion to be able to make his business work. I would probably tell someone to take a more conservative route of getting more education, over-performing at their job, trying to improve their position that way rather than taking on debt to start a business.

Either way, I agree with your main point that maybe something else needs to be done other than just stay the course and just continually chip away at it. I love having you on as far as a back and forth, because you're not scared to contradict me, which is helpful, because then you can clarify things.

So much of finance and financial discussion is nuanced and situationally applied. You make good points, and I don't want it to sound like I was recommending, "Just go out and borrow more money." The major point was just simply about scale. It's funny how it seems like it's always in real estate.

I knew some friends of mine here in West Palm Beach that really ran into some major problems in 2008, 2009 with the real estate crash. These guys were young guys, and they were so deeply in debt as far as on their portfolios. Now, they could have declared bankruptcy, but they could have done that.

But the reality was that the scale at which they were already—you know what? This is actually probably the major point. So the encouragement would be if you're in a lot of debt that you can't just simply sell whatever you have the debt on and you can't discharge it in some way, you may need to adjust the scale of your thinking.

And that doesn't mean go and take on more—necessarily go and take on more debt, but you may just need to adjust the scale of your thinking to match the scale of your obligations. You may need to be pretty hardcore about getting the higher-paying job. You may need to be pretty hardcore about pursuing the side work, whatever it is, and go after something that has the potential to really pay off big time.

Yeah, I agree. I think it's toughest for those people who, say, went to law school and racked up $200,000 in debt or whatever, and then go into big law or whatever and just hate their job. And I don't think anyone should spend years of their life doing something they hate, but they're in a really tough situation.

So those are always the people I feel the most for, is people who feel trapped. Right. And the student loans, those are the ones that are just always so pernicious. I mean, everything else that I can think of off the top of my head— is it possible someone could get into $50,000 of credit card debt?

Sure it is. But usually they're making decent income. But student loans is the one where oftentimes people who haven't made or aren't making a lot of money wind up owing a lot of money. I mean, you may borrow $2 million for a business, but your business goes bankrupt. You go through bankruptcy, you're discharged with $2 million, and you move on with your life.

But student loans, you don't have that out. And so sometimes you're exactly right. Law school, medical school, advanced graduate school, a lot of money, expensive school, and it's not paying off. That's the major challenge. That's a tough one. All right, a couple other real quick ideas. You were talking about the person with a large amount, $200,000 of debt, and working at paying that off and staying the course and how that might be difficult.

And that made me think of one factor that actually applies both ways, and that's how well can the person just stick with it? What sort of discipline do they have to do that? So if they've got $200,000 in student loans and they're--it may be hard to just continually throw money at that and feel like it's not really making a difference and barely making a dent.

And so it may be beneficial psychologically for them to start investing because they can then see that balance grow and have more of an impact and just kind of--I wouldn't say not worry about, but not focus so much on that giant what seems like a mountain of student debt, but focus on--simply because if they lose the discipline, if they're like-- and then they stop saving, they start consuming more or whatever, versus if they can focus on the savings.

And that might go the opposite way, too. Someone who maybe has only mortgage debt and they've got $167,000 in mortgage debt, but they're not quite throwing as much at their savings as they could, but if they were focused on that mortgage debt, they'd have a lot more discipline to throw money at it, kind of what we mentioned earlier, the intensity of the focus of the goal.

It kind of works both ways, and you may have to decide, like, "I'm more focused on paying down debt, so I'm just going to throw as much money as I can at it," or "I'm kind of feeling overwhelmed by the debt, and that's causing me to go out and spend more, and maybe I should not focus on that debt instead, but still take that extra money and invest it." Great point.

Great point. And then that also helps to build--and also another advantage to your point-- is that can help someone to build the personal financial and investment literacy that they need to succeed. Because, again, an average person without education--and yes, you and I, we can always use-- just, you know, "Hey, buy this index fund," and that should be always our proxy, but the average person, index fund owner, probably underperforms their own index fund.

So you need to build knowledge, and probably even considering the plan that you just laid out, if that will encourage someone to build up knowledge because they're taking an interest in their investment portfolio, that can be so powerful because that will increase the rates of return that they can earn on their investment portfolio and will adjust their personal situation.

So I like that point. And then later on, you know, hopefully when they're out of that debt, they'll have learned those crucial skills that will allow them to deal with market volatility. Hopefully they'll have learned, "How do I react when the markets go down or up?" And they will have learned what sort of investments they prefer.

And, you know, I think that's important for any investor is to learn about different asset allocations and to learn about their own emotional mindset and how they deal with the market. And, yeah, if you're just constantly throwing money at student loans and never investing, you don't get that what can be a real crucial experience.

Yeah, good point. I like it. Inflation is another thing I wanted to touch on. And it's one of the factors in all of that, you know, when we keep referring to the ubiquitous, the math of it, is the fact that inflation exists and right now it's fairly low. There are, you know, some people who think it's underreported.

But that aside, inflation is generally around 3% to 4% right now and has been for quite a while. And that's right around what mortgage rates are. And what that means is your actual cost, your real cost of your mortgage is around zero. If you can invest in something, and so this is when we were talking about that math, comparing those rates, if you can invest in something that earns more than inflation while your debt is right around inflation, you know, you'll have that positive arbitrage.

But the neat thing about this is, in my opinion, I don't think we're going to stay at these rates forever. And if you look historically at mortgage interest rates, they average more of about 7% to 8% and peaked as high as 18% in the early '80s. And so if you have your mortgage debt and you are trying to decide, should I pay this down or invest, and it's at 4% and you're trying to decide, well, I can invest in something that's going to earn 5%, is that worth it or should I just pay it off because that 5% after taxes, maybe it's kind of break even and maybe I'd just rather get rid of the debt and have my life simplified.

And so you're trying to make that decision. Keep in mind that if and when inflation rises, most likely those investments will rise as well. And if you look at the original Your Money or Your Life book and you look at his investment suggestions in that, he says invest in government T-bills because you can earn 8%, 10%, and then you're set for life.

You just dump all your money into government bonds and you're great. And that doesn't work today because of what our interest rate environment is like. But it very well may be the case that in a short number of years we may be in a situation where that is the case.

And where CD rates a decade ago were at 4%, 5%. And you might feel pretty silly having paid off a mortgage at 3.75% if CD interest rates are at 5%. If you could take that money, stick it in a CD, pay that mortgage interest, pay that mortgage payment, and have some extra cash for yourself, you might feel kind of silly.

And so if and when interest rates do rise and other investments, both kind of more secure ones and more volatile ones, rise along with it, then that mortgage interest rate that right now looks fairly comparable to some of your investment options or the investment options are only slightly higher than that mortgage interest rate, if and when inflation hits, there might be a lot bigger gap.

And it might be worth holding that low-rate mortgage for now even if you're only earning a little bit above it because there's the potential to earn a lot more. It's an incredibly valuable consideration. And I'll kind of add a couple thoughts to it because you could pursue this line of thinking and you would need to have at least a general macroeconomic outlook to expect that inflation might be higher.

And then you could get pretty specific with this. So one of the risks that you would be open to is that all of us, most of us, is that the majority of the financial transactions in our life are conducted in U.S. dollars. So if inflation rates increase, whether that's just simply to general acceptable inflation levels or higher than generally acceptable or mass inflation or hyperinflation, if you just say, "Okay, we go from 4% to 10% inflation," then every cost in our life goes up.

So if you dutifully paid off your 4% interest rate mortgage, you dutifully paid that off, now you have no savings and you have a house that all of the costs associated with the house are going up and all of your day-to-day costs are going up, and maybe your investment portfolio is returning, but you haven't benefited at all from that.

You haven't had anything go down in cost. So when people talk about keeping a mortgage payment is, in essence, shorting the U.S. dollar, that's what they mean is that if you have a mortgage payment locked in at 4% on a fixed-rate mortgage, then if inflation goes up and if everything goes up except the cost of the mortgage, and then if your investment portfolio is able to return a higher rate of return, you're diversified against basically those changes in the U.S.

dollar. There are a few ways to--the major way to diversify that I'm aware of, the major way to diversify, the probably most reliable way to diversify out of fluctuations in currency would be to transition from currency to tangible goods. Then number two is then you've got to look at what's the performance of the investment portfolio.

But a fairly easy way is to say, "Okay, I'm going to short against this risk, and I'm going to short the U.S. dollar by maintaining my mortgage." So you make a valuable argument, and I think that a compelling case right now can be made for this. I completely agree, and to elaborate and maybe explain that in a slightly different way, because I know a lot of people when first presented with this concept, it's kind of a little bit confusing.

And so real estate itself is an inflation hedge, because even if your property is paid off, it should rise with inflation because as the cost to build a house rises, because the wood and nails and everything used to build it, those goods cost more. Then it costs more to make a house, the labor to build the house rises, everything.

The people who would potentially be buying your house, their wages have risen, so they have more money to pay for it. So theoretically, your house itself, even if paid off, should rise with inflation. But if you have that mortgage payment, that stays fixed and doesn't rise. So if you are either still working, theoretically your wage income should rise to pay for that extra-- or not extra, your wages should rise, and your mortgage payment is fixed, and so you have that extra surplus you can keep.

And if you're not working, if your money's invested, then that investment should make extra, and you can keep that surplus, and that payment is fixed. And if you had put that money into paying down that mortgage, that money's not making any extra. Right. Right. Yeah, it's-- It's a tough one to get across if people aren't comfortable with it.

And it's incredibly true, but it's also just non-intuitive to short-- because our memory span, our time span is so short-term generally. I would just ask people, consider your grandfather's mortgage payment. It probably was nowhere near yours, and that can illustrate the benefit over time of having-- when you're earning a higher wage--if your grandfather had been working the whole time, and he was earning the higher wage, ideally your wages would be adjusting with inflation, and then you would be able to pay it off at that lower rate.

Yeah. And to give a concrete example to it, if we think about a rental property, and let's say I can buy a rental property in cash, or I put down a 50% down payment and buy two. I use leverage, and I get a mortgage on two different properties, and I split that cash that I have instead of paying 100% for one and having no mortgage, I pay 50% on two.

And let's say they each rent for $1,000. Well, as inflation occurs, my renters make more money, and I raise the rents on them. Now I'm making $1,500 each. I'm making 50% more after, say, 10 years or 15 years. I'm making 50% more on the rents. In my first scenario, where I did not have a mortgage payment, and I bought the whole house outright, my payments went from--or my amount of rent I was getting went from $1,000 to $1,500.

I have an extra $500. In the second circumstance, my rents went from $1,000 to $1,500 on both those houses, so it went from $2,000 to $3,000. I'm making an extra $1,000. Now, my mortgage payments didn't rise. So even though I'm probably--I mean, it depends on what my cash flow would look like in that original circumstance of how much those houses are returning me, but hopefully your mortgage interest rate is less than the amount you are earning from the renters, is less than your cap rate, such that you have positive leverage, and you're actually earning more, cash flowing more from the two houses, even though you're paying two mortgage payments.

Hopefully you end up with more in your pocket than you do the one with no debt. But even that aside, let's say they're just approximately equal. Well, now I'm getting an extra $1,000 in my pocket instead of an extra $500, and that is solely due to inflation. That's solely due to having those two mortgages and using the leverage, and then having that debt fixed, so that I'm still making that same payment, but I have an extra $1,000 in my pocket instead of an extra $500.

So taking advantage of--and that doesn't just apply to rents. It's if instead of paying off my primary mortgage, I took that money and invested it. Now, even not in real estate, but in the stock market, theoretically, if it was returning the same as that those rents were, I should now have an extra $1,000 in my pocket or an extra $500 above what I would in the other circumstance.

So a lot of people, when they hear this, they think, "Well, inflation doesn't matter because you have no debt." Yeah, you have--in the case where you have the mortgage, it's a fixed payment, but if you just got rid of it, you'd have no payment at all. And it's like, true, but the opportunity cost of that money to get you to no payment is that extra cash in your pocket.

It's a good example because it illustrates the much higher potential impact than I think we often think about. Another time we'll have to debate how and why--this would be a fun conversation to have offline-- but we'll have to debate how and why, if all of this knowledge about what direction interest rates are going is such common knowledge, who's actually issuing the mortgages at 3.5% and 4% and who's buying those loans as an investment?

But we'll save that for another time. I always puzzle over that, trying to figure out and trace the money through. But it's a good example. We have a very manipulated market for that. It's definitely not a free market. The government has its hand in influencing that and keeping rates low for a number of reasons.

That's just a short answer we won't go into. And then, of course, you and I can't resist, and then you get into, "Okay, well if they're willing to do that, then where do they make their money?" Ah, they create the money and they get a profit off the money.

Oh boy, yep. Another conversation another day. I have a wrap-up thought, but is there anything else on your list that you've thought of that we haven't covered? I'm sure there's something, because there's just so many factors. But one thing I would encourage for my last thought is I hope we've given kind of a good balance between reasons why you might or might not invest or pay off debt.

I think ultimately it comes down to more than math, but if you have the discipline and the emotions aren't going to bother you, then primarily do consider which is the optimal mathematical strategy and try and stick with that. But there are always other valid reasons why you might not follow the mathematically optimal strategy.

I do think the mortgage is a special case where it very much does not make sense to pay off a mortgage. And let me, real quick, I know we're running so long. No problem, no problem. I refuse to set time limits on this show if the content is good, and the content is good, so go.

We'll go all night. I want to debunk a myth that people always say that just frustrates me every time I hear it, so hopefully your listeners who have heard this will now have a reply to this. But people say this statement, they say, "It doesn't make sense for me to spend a dollar to get 25 cents back in taxes." And they're talking about the mortgage interest deduction, and they say, "But why would I want to give the government"-- and their point is, "Well, if I pay-- for every dollar I pay in interest to the bank, if your marginal tax rate is 25 percent or whatever, say you can deduct 25 cents of that." And so then they're like, "But I'm still losing 75 cents.

How about I just pay it off, and then I don't pay any interest?" And so intuitively, when you first hear this and you don't understand it, it makes sense. "Yeah, why would I pay a dollar to the bank so I can get 25 cents back from the government? That's silly.

I'm just losing money." But what that statement fails to consider is the opportunity cost of the money. And if I can invest that dollar, instead of paying off the mortgage, I can invest that and earn a dollar, and now I pay a dollar in interest and get 25 cents back, what I've just essentially done is gained myself 25 cents.

So I take the money that I would pay off the mortgage with and invest it and earn a dollar, and then I take that dollar and pay that dollar to the bank as interest, and now I have paid interest, so I get 25 cents back. And what I've done is netted myself 25 cents, versus if I just paid off the mortgage, I wouldn't have earned that interest, I also wouldn't have paid any of the banking, I wouldn't have got any back from the government, and I would have a net of zero.

And so what you have to consider is, what else can I do with that money? Because it may be better to be paying interest if you can earn more than that interest. And that's where that--it all boils down to that number we've been talking about, is the amount you can earn on the investment more than that interest rate.

And that's why it can make sense to pay that interest, is because of what else you're doing with the money instead. Right. And that's a good example of how few critical thinking skills it seems we apply as a culture to this area, because we all feel intimidated by money, and so we all look for our expert to tell us, you know, here's what we should do.

But the assumption that the rebuttal to your--the rebuttal to your rebuttal would be, well, if you're just going to spend the money going out to the movies and buying clothes, then yeah, it's better--you know, you should just pay off the mortgage, which is a completely silly thing, because that's not necessarily the question.

But you get this myth stacked upon myth stacked upon myth. So one person says, it's bad to have a mortgage. The person says, well, it's good to have a mortgage because you get a mortgage interest deduction. Well, that's a myth that it's good to have a mortgage because you get a mortgage interest deduction.

So therefore, that's the myth, and now you should just pay off the mortgage. Well, now you're debunking that one. Okay, it's a myth that you should pay off the mortgage, because it was a myth that you should just get a mortgage for the mortgage interest deduction. Don't you see what the whole point is, which is actually like this whole thing integrated?

Yes, that was me banging on my desk. We've got to see past the myths, and we have to be able to educate ourselves to the point where we can look at our situation and then diagnose our problems-- diagnose our problems and then kind of work with our specific situation.

Each of us has a unique opportunity. Each of us has a unique set of circumstances, and you've got to look at what your situation is. I mean, just thinking about the mortgage interest deduction is not-- that in and of itself is not just a myth. The key is, okay, are you going to deduct it on your mortgage?

Are you going to consume this money, or are you going to pay extra on the mortgage? Well, if your choice is consumption, it's better to pay extra on the mortgage. But flip that around and say, I've got money--I'm putting money in my 401(k), and I'm going to choose not to put money in my 401(k) into excellent investments, to not get the tax deduction there, and then I'm going to turn around and use that money to pay off my low fixed interest rate mortgage that's also deductible, and I'm able to deduct it on my return.

It's a different situation. So I'll give you the semifinal word, Joe, and then I'm going to come back and wrap up with just a real quick summary. But hopefully you've busted that myth, and it's a shame that we have to kind of have this myth-busting type of conversation, but it's so necessary in our culture.

Yeah, I think you bring up a good point that we didn't even really touch on with the 401(k) and that I hope everyone is kind of maxing out those accounts before considering paying off low interest fixed long-term debt that is deductible and taking advantage of those tax benefits. One thing I would consider or tell people to consider is mortgage debt to me is kind of a special case, and the reason being is that it is low interest long-term fixed debt, and you really can't get that anywhere else.

Credit card debt is definitely not low interest. You might get a 0% balance transfer for 18 months or something like that, but you're not going to get that fixed for 30 years. And so the fact that mortgage debt is that way, I think one should approach it with long-term thinking.

And so one kind of final point I want to make is that over--and I just Googled this, and this was as of a couple years ago, but it says the average annual return for the worst 30-year period for the S&P 500 was 8.5%. So that includes the Great Depression, that includes--now, that's only America, and maybe you think the future is going to be worse than the past, but we've never had a 30-year period worse than an 8.5% return.

So if you are taking a debt that's at 3.75%, and it's fixed for 30 years, and you're paying that off, you're in essence giving up 5% or so. The difference between that--and that 8.5% was, again, the worst 30-year period. There have been, of course, much better 30-year periods too.

And so if you're giving up 5%, let's say your mortgage is $200,000, and you pay it off, or you took that $200,000 and you invested it over that 30 years, that 8.5% versus the 3.75%, that approximately 5%, 5% of $200,000 is $10,000. You're basically giving up $10,000 a year every year to pay off that mortgage.

I'll give you the 30-year returns. So $200,000--let me redo my math, make sure--$200,000 present value, 5% interest rate, 30 years, no payments, which is a separate thing. I just can't factor it in. So present value of $200,000 at the worst is $864,000 at 8.5% in 30 years. Okay, now let's not do 8.5% though, because you would have had to be paying 3.75%.

Right, excuse me, I actually did 5% accidentally, sorry, I misspoke. So I did 5%, at 5%, $200,000 grows to be $864,000. At 8.5%, it would be $2.3 million. So yeah, correct, I used 5%. So the real return, the real difference there, ignoring cash flows, which you can't ignore, but for the purpose of on-the-air math, it's an $864,000 deal.

Right, and so you're potentially giving up hundreds of thousands of dollars to pay off that mortgage. And maybe that's worth it to you, maybe you have an abundance of money that's way past needing to worry about any sort of dollar amount. But to me, that's a lot of money to leave on the table, money that could be donated to charities or left to children or whatever you want to do with it.

But if you can have the discipline to look at this, to look at a mortgage, maybe a little differently than other debts and understand that instead of thinking of it as debt, it's leverage, it's a tool that can be used to, by investing instead, to really boost your return such that you are left with hundreds of thousands of dollars extra.

Right. Mortgage debt really is, in many ways, almost a special class. The banks have created a pretty sweet deal for themselves, it's very profitable, it's well secured, they're happy with it. The National Association of Realtors has created a pretty sweet deal for themselves with their tax deduction, it's not likely to go away, there's no political will for it to go away.

You mentioned all those reasons. It is, in many ways, a very special form of debt and a very special form of financing, and it's hard to find another form of financing that is as leverageable safely as mortgage debt is. So it's a good point. To me... Go ahead. Okay.

One other consideration for people who are early retiring specifically, or people who maybe are venturing out on their own in terms of their job, working for themselves, things like that, but who are specifically worried about the cash flow aspect of it. Another idea to consider. Sometimes you'll have people who come on an early retirement forum and they say, "Hey, look, it makes sense to pay off my mortgage at 3%, 4%, whatever, even though I can invest at 8% because it frees up all this cash flow." And so I need to have way less money saved in terms of my total portfolio amount because it just drops my expenses so much that the 4% withdrawal rate, needing 25 times my expenses and assets, I need so much less, and then I can retire right away.

And if I just take this chunk out... So they go, "If I take this $100,000 chunk out of my $1 million portfolio, that drops my expenses enough that I will have enough, but otherwise I won't have enough, and I'm going to need to work for four more years." And I think the thing they're missing with that is...

And so you say, "Okay, well, but if you take that money and you invest it and you use that to pay the mortgage payment, well, that $100,000, that extra $100,000 that you have invested isn't enough to pay the mortgage payment." Let's say that $100,000 earns you 5% for the year, and so that $100,000 earns you 5,000, and your mortgage payment is 1,000 a month, and so your mortgage payment is 12,000 for the year, and you're only going to earn 5,000 from that.

And so they go, "Doesn't it make sense, then, for me to take that $100,000 and pay off that mortgage because now I'm improving my cash flow by $7,000 instead of paying 12 and getting 5 from that $100,000? I just eliminated the 12 altogether." And they say, "Doesn't that make sense?" And the answer is no.

But it's weird because it does seem to make sense on its face, but what they're forgetting is you can draw down on that principle. And they go, "Well, I don't want to draw down on principle. I'm not comfortable with the idea of drawing down on principle, and I'm trying to only live on dividends and rents, and I'm trying to not withdraw any money." But if they went and paid off that $100,000 mortgage, they would be withdrawing principle.

They'd just do it in a big chunk to begin with. And if instead you were okay with saying, "Well, that $100,000 is going to go towards paying off my mortgage, but what it's going to do is the first year it's going to earn me $5,000, and then I'm going to use $7,000 of it to make the rest of my mortgage payment.

And then the next year it's going to earn me a little less than $5,000 because the principle is smaller. Now it's going to earn me $4,500, and I'm going to pay $7,500 of it." And so in the end, five years from now when my mortgage pays off naturally, you will be left with a larger chunk of money, however much money that $100,000 earned in the meantime.

And so if it's at a higher interest rate, if it's at 8% and your mortgage is at 4%, and you're like, "Well, but it's going to still take four more years to pay off, and I have to keep working those four years, otherwise I could just immediately retire if I just withdrew that and paid it off," it's like, go ahead and immediately retire, but be okay with using some of that principle to pay down, even if the interest doesn't completely pay your mortgage payment, you are going to use that principle anyway, if that makes sense.

So I wanted to throw that out there because that is a not uncommon scenario for people to think in terms of cash flow and say, "It makes sense to pay this off completely," and I wanted to add in that perspective of, when you're doing that, you're withdrawing a big chunk of principle from your portfolio, so if you're okay with that, you should be okay with withdrawing it a little bit slowly over time and leaving it in there as long as possible to earn as much interest as possible in the meantime.

There's a concept we talk about, or actually some of the formal financial literature talks about, and we think about it a lot in terms of how to advise clients, and it has to do with framing, is that the way that you frame a discussion, the way that you frame a recommendation, will often affect how the client feels about it, and we don't need to go into any examples, but just the word "framing" is important, and a lot of times the key variable that we miss is the appropriate frame for a decision, and so much of successful planning is understanding those psychological tricks, just like you described.

Okay, I see the math here, and so what I'll do is I'll give myself the permission to just simply say, "Well, this money here is earmarked towards this goal," and we call that a "bucket of money" approach in the formal retirement distribution planning, so this is the bucket of money that's earmarked towards the mortgage payoff goal, and then just by framing it in that way, it gives you the permission to adjust your thinking about it, so it's a very valid and important example that you give, I think.

Yeah, I completely agree, and one other framing thing that has kind of come up throughout our conversation is that psychology of "I'm happy paying off debt, I feel better being debt-free," if you're a listener who feels like that, you have that psychological mindset of "I'm happy being debt-free," you might be able to reframe your mortgage debt in terms of "I'm happier not leaving money on the table," like I mentioned earlier.

And a lot of people will look at how much interest they're going to pay over the next 30 years of their mortgage, and they look at it and they say, "Oh my goodness, I'm going to have to pay double the cost of my house, and I'm going to have to pay $200,000 extra in interest by keeping this mortgage, so by paying it off I save myself $200,000," and so that's how it's framed in their mind.

And if instead you tweaked that and said, "If you invested that money, you could have an extra $800,000, so would you rather have $800,000 and have paid an extra $200,000 along the way, or would you rather have not paid that extra $200,000 along the way but also not have that extra $800,000 in the bank?" And if you can reframe it like that, you might be able to psychologically trick yourself into being okay with it for the purpose of understanding that it might be mathematically optimal to do so.

My kind of summary statement to pick up on that and kind of give my summary statement, and I'll give you kind of an opportunity to give your summary, is based upon the premise that you're going to invest effectively and successfully. So that's the primary premise, because if your decision is, "Should I choose to pay extra on debt or should I consume the money?" you're always going to be better off paying the extra on debt.

But if the comparison is, "Should I choose to pay extra on debt or should I invest in this other quality investment opportunity that has the potential and probability of a higher rate of return when adjusted for risk, when adjusted for other variables?" then the challenge will often come down to, "Do I want to follow the math or do I want to follow the emotion?" And the problem with conceiving of the math is that it's so long-term.

I think that if I said to most people, you know, gave you the example, "You're paying extra on your mortgage," and I said, "Well, you have the opportunity at the grocery store this month to stock up on groceries," because there's a 50% sale, so there's an extra month on grocery, so you can stock up at this big sale opportunity.

But in order to do that, you can't send extra money toward the mortgage. Then most people, I think, because that's such a short-term opportunity, would probably jump at that and say, "You know what? I'm going to take the extra money that I was going to send to the mortgage and I'm going to stock up on groceries, which will effectively get me through two months, which just saves me a massive amount." Now, that's kind of an extreme example, but it's easy to say, "Oh, yes, I see that buying this thing in bulk on this discount will be better than paying extra on my mortgage because it saves me a lot more." It's very short-term.

It's very tangible. The flip side is all you've got to do is just figure out a way to frame the discussion and apply it in such a way that you can see it going forward and in the long term, because in the long term, mathematically, if you have a higher expected rate of return from your investment opportunity when adjusted for risk, when adjusted for all those other factors, you're always going to be better off investing.

It often comes down to the math versus the emotion, and you can adjust the emotion. However, I would say emotion is 100% a valid planning concept, and you have to consider it in your own situation. There may be a way that you can tweak the emotion, but at the end of the day, the formula for wealth is always adjusting those three variables.

What's the income? What are our expenses? And what's the rate of return that we're either earning on investments or paying on debt if we're still paying it? We've got to work on income and expenses, and then it's all mathematical as far as saying, "How can we refinance debt, move debt?

How can we keep terms and interest rates on debts at the most optimal amount? And then how can we invest this money in the most ideal and optimal way?" And by affecting that, that will ultimately affect the amount of wealth that we have. That would be my summary statement, is you've got to consider both of them, but consider if you're framing the math properly so you can take advantage of the emotion and control the emotions that aren't serving you and enhance the emotions that are serving you.

Joe, I'll give you the last word. That was a terrific summary. I completely agree. I think we kind of meandered around, but I think we got a lot of good stuff that hopefully will give people to consider when paying off debt. One last thing, though, because I am such an advocate of keep your mortgage and invest instead, is I want to tell people who are considering that that thread you mentioned on the forums earlier, which was "How much am I delaying my retirement by paying off debt?" I think was the title.

And in that thread, I advocate quite strongly for keeping your mortgage, but we go through the math and multiple different scenarios, and people talk about it. People pop up with, "Well, what about this and what about that?" And a large number of people go back and forth for probably five or six pages just talking about lots of different scenarios.

So if you're on the fence about that idea and you're still not quite sure, and you want some actual real hard numbers that we couldn't really get into here just discussing it, that's a great resource. Joshua will put it in the show notes, I'm sure, and go look for that.

And feel free to, if you have your own scenario, reply and add your own questions or start your own thread. But that thread in particular, I think, covers a lot of the specifics on why you might not want to pay off your mortgage. But in general, I think that summary you said was great.

And if someone does, after reading that, decide, "No, you know what? The benefits for me of being debt-free and not having that outweigh," then absolutely you need to do what's going to make you happiest at the end of the day. Right. Absolutely. I'll make sure to link to that.

And that's one of the benefits of just how great the Money Mustache Forum is. I mean, there's so many smart people in there who are – I mean, you're one of them – who will take the time and go through. And it's so important and valuable to check our thinking and to apply some critical thinking and check ourselves out and see what our flaws are, see what our logical fallacies are, see what we're missing, see how we're misframing the conversation.

This show should be a good example. I'm not sure whether I'll release this as one show or two shows. But I've often – people ask me and question me about the length of the shows. And oftentimes people will say, "Well, why don't you do like a 15-minute-a-day show or a 10-minute-a-day show?" And I think there's a place for that.

I recently saw a guy that started a 10-minute daily money tips, something like that, podcast. And I think there's a place for that. But the problem is that if you're listening here at the end of this show, you should get a concept of in many ways how complicated but yet how simple financial decisions are.

But the problem is we're dealing with human behavior and human nature and all of these things. So you can't boil this down to a soundbite. So, I mean, it's taken us two hours to wade our way through a fairly simple question. And Joe can just say, "This is the way it is," or I can say, "This is the way it is." And then with that information, you can just go and take our opinion.

But you can clearly see that anybody who just automatically retorts and says, "This is what you should do," probably either has a very strong opinion of what's right for them, and that may be right for them, and it may not be right for you, or may not know what they're talking about as far as all of the factors that would go into it.

So I think it's a valuable illustration as to why I wind up with two-hour shows. You understand a little more now, don't you, Joe? I do because I was one of those people wondering because I'm constantly trying to keep up with all the episodes you put out. And I'm like, "Man, these are just so long, and they're so good, but, like, can you --" But, I mean, it's true.

We could have in 10 minutes wrapped up this question with just a bullet point list and said, "You need to look at liquidity, and there's emotional factors, and you need to look at what the interest rate is," and da-da-da, and just real quick. But, you know, there's no sort of understanding there.

There's no sort of nuanced discussion where you can get into how those factors play out in the real world. And so, yeah, it sometimes does take a little longer than you might think. It does. It does. Well, Joe, thanks so much for coming on the show. We'll be back soon with Part 3 whenever we do it.

I guess we'll maybe do it a few weeks, and we'll come back and answer the next Early Retirement FAQ. And I thank you for making the time to come on the show. Sounds good. It was my pleasure. Told you it wouldn't be an easy discussion, but that there would be an opportunity to learn quite a bit through it, right?

You can tell from after an hour and I don't know how much time, you can see why this discussion is so constantly debated. But my hope is that the information in today's show gave you a place to start while making your own decision. Now, here's what I would recommend that you do.

Take this information in to your own personal situation and look with a hard eye on what your actual factors are. You may very well have other outside factors that we didn't even cover. For example, we didn't cover things like religious conviction. Somebody might have a religious conviction and feel a leading to pay off their debt.

In that case, that's a very important discussion. You need to make sure that you give that a high priority. So there are a lot of other extenuating circumstances that Joe and I didn't cover. But hopefully you can see that there is a little bit more texture to this decision.

And probably the only wrong decision is an unexamined decision. So whatever decision you've made and are choosing to make, compare that in light of the information in today's show and figure out if you're confident in it. And if you continue to be confident in it, then continue with the path that you're on.

But hopefully this gave you some information to feel like you can more effectively make a personal decision. That's it for today's show. I thank you for listening. If you have comments, I would love to hear from you. Come on by the show page at radicalpersonalfinance.com/95 and comment there. If there's something that we missed, that I screwed up, that Joe screwed up, come by and let us know.

I'm sure he and I both will hang out there in the comments so that we can answer those questions. If you're interested, come on over to the forum thread where we've been talking about this and feel free to interact on the Money Mustache community as well. That's an awesome community.

I would encourage you to get involved there. Thank you for listening to the show. Oh, I want to read two reviews. Number one came in, a five-star review from Merimar999, says, "This show is awesome. If you're looking for a good show on personal finance," this is an iTunes review, "I highly recommend this podcast.

Joshua is an amazing person and his expertise, knowledge, creativity, but more importantly, compassionate and authentic. Lots of great ideas around savings, wealth building, simplicity, and consciousness around money." Thank you, Merimar. I appreciate that. Oh, and a two-star review from Sweden on the Swedish iTunes page by Pia. P-I-A is the screen name here.

"I wish someone could help this guy with the podcast. I understand there are highly interesting and important things he has to offer, but the essence is lost in the massive talk, talk, talk. Unfortunately, it's almost unbearable to listen to." Man, I'm sorry about that, Pia. I'm doing my best.

Thank you for the feedback. I certainly calculated it in. I have been working hard to tighten things up, and I will continue working hard to tighten things up because I don't want the message to be lost in an abundance of words, words, words, talk, talk, talk. It is very challenging to me because I do have a conflict that I do view.

One of the problems with financial talk is that people are often treated too simplistically. So even in a show like today, you can hear how it's frankly not as simple as often people would declare it to be. So I'll do my best to keep tightening it up. In the meantime, there may be some other shows that you might want to check out that are more concise, and I thank you for the feedback.

Thanks to all of you who have been leaving reviews. Please make sure to subscribe on iTunes and on Stitcher. Leave me a review in either of those places. I still only have four Stitcher reviews, so any of you who are listening on Stitcher, I would be thrilled if you would rate the show there and review it.

That would help. Stitcher is a massively growing audience, and it's in many ways far more impactful and will be in the future far more impactful than iTunes. iTunes is rapidly becoming—it's still the big dog, but it's rapidly becoming a smaller dog in the world of podcasting. I'll be back with you tomorrow with another show.

Thanks for being here today and for listening. Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you. This show is not, and is not intended to be any form of financial advice.

Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions. Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.

If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here. With Kroger Brand products from Ralphs, you can make all your favorite things this holiday season because Kroger Brand's proven quality products come at exceptionally low prices.

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