Hello everybody it's Sam from Financial Samurai and in this episode I want to talk about one of my favorite topics paying down or paying off mortgage debt. Now I am a proponent of paying off mortgage debt faster and sooner and especially before you retire. I believe the more you pay off your mortgage the more courage you will have and I talked about this in an article regarding buying a house with cash and actually not feeling that bad during the height of the downturn in March 2020 so far.

And I was just talking to my wife and I was wondering you know things are really bad but they don't seem too bad and I was thinking to myself what was it that made me feel more sanguine versus back in 2008 and 2009 when we didn't have any kids and it was just us to provide for.

You would think that with two kids we would be freaking out even more right two kids, two mouths to feed, tuition, just unknown expenses out the wazoo. But that one thing that kept us more calm I think was not having a mortgage and this is the first time we have never had a mortgage in our entire lives in our private residence.

In the past our expenses our housing expenses were about I don't know 10% of our gross income something like that and that's the level I think that everybody should try to shoot for 10% or less just like the 1/10 rule for car buying. If you've got your housing expense whether it's rent or your mortgage, property tax and all that below 10% of your gross income I think you're gonna feel a really good sense of calm and so we took this a step further and lowered it to about 3% or maybe it's like 2% of our gross income I don't know what it is but it's much lower and we feel even better.

So you've got to ask yourself how much is the feeling of calm and peace of mind worth to you? As we age we should get wealthier and as we age our lives get a little bit more difficult and complicated because we might have health issues or we might have to take care of our aging parents or kids for that matter.

Whatever the case may be life is not gonna be what you expect it to be at least not exactly that is. For example for us we didn't expect to have two kids at this age and I'm almost gonna be 43 and my wife's almost gonna be 40. I thought maybe we'd have one kid or no kids and just life just changes so always expect some change.

So with regards to paying off mortgage debt and investing I believe you should do both. If you are in the early part of your wealth accumulating stage or in the middle part you should do both and I have this thing called the FS-DARE methodology which is called Financial Samurai's Debt and Investment Ratio and basically it's a smart way to think about investing and paying off debt no matter where you are in your life.

FS-DARE is based on the debt interest rate you have. So if you have debt then you want to tackle that debt based on the level of interest. The lower the interest rate the lower the debt pay down allocation and vice versa. So for example let's say you have debt at 6%.

Well I think you can allocate 60% of your cash flow to paying off debt and 40% to investing. If you have 8% interest rate well 80% debt pay down allocation and 20% investment allocation. Once you get to 10% I think you've really got to tackle your debt head-on. 10% is a very very high debt interest rate especially when the 10-year bond yield which is the risk-free rate of return is at around 0.7% now it got down to about 0.48% during mid-March 2020 and I believe it's gonna hover below 1% for this year 2020 next year and beyond.

I firmly believe we are in a low interest rate environment for life. I've been saying that since I started financial seminar in 2009 and I continue to believe this. People think our interest rates are gonna skyrocket you got to get a 30-year fixed and pay more because you want to lock it in for 30 years and so forth.

I don't believe that. I don't believe that because we are a much more efficient world now. So we are learning from what our mistakes were. We have technology that blasts information in nanoseconds. We're all interconnected so when globally countries are lowering their interest rates we must follow suit because of US dollar denominated debt capital accounts, current accounts and so forth.

So we're all interconnected. We've learned from our mistakes. We're more efficient now and we are able to tackle inflation much easier as a result. Therefore interest rates should stay low for longer. Once again if you've got debt interest rate at 10% or higher I would focus 90% really a hundred percent of paying off that debt.

You really shouldn't have debt that expensive which means automatically pay off all your credit card debt because the average credit card interest rate is around 16-17% I mean that's ridiculous folks. Ridiculous. Do not have revolving credit card debt. Please crush that debt every single month. Be responsible and then tackle your other debt.

Your other debt should not have interest rates that high including auto loans, mortgage loans and so forth. Personal loans as well. Personal loans should be below 10% as well. Once again if you are in your rapid wealth accumulation phase focus on paying off debt and investing at the same time.

It's a logical framework. Go for it. You're gonna feel good about it over the years. Now if you are at the stage where you are past the rapid wealth accumulation phase, you're more on the capital preservation phase, then no matter what the interest rate is I recommend allocating more to paying off debt.

I have never once regretted paying off debt whether that was in 2015 when I paid off my condo mortgage debt or back in 2008 when I paid off my MBA student loan debt. That was around $40,000. I've never once regretted it even though I could have made more money in the stock market.

Hey I could have lost money right? If I didn't pay down $40,000 in debt in 2008 maybe I would have invested that money in the beginning of 2008 and lost 50%. You just never really know. But knowing is part of what we all crave for right now especially during a global pandemic.

It's that uncertainty of how many deaths there will be. It's that uncertainty of going to the grocery store and thinking to yourself, will I get COVID-19 by just touching the cart? Will I accidentally touch my face or my nose or my eyes and get the virus? It's the uncertainty of when the lockdown will end.

Will we be trapped at home for another two three months because the vaccine is not going to be out until 2021 at the earliest? That uncertainty is what we all crave and paying off your debt and paying off your mortgage is that certainty that you will achieve and that peace of mind is amazing.

I'm telling you folks it is an unbelievable amount of peace of mind. The other thing about paying down your mortgage or having no mortgage really is having more courage. For example in mid-march 2020 when the market was selling off 10% a day it was nuts. It was crazy. It was scary.

I was concerned. What's going on here? At this rate we're gonna go to zero in like a month. It was just wild wild wild wild. But having no mortgage gave me the courage this time, unlike in 2008 and 2009, to actually invest a decent amount of money beyond my 401k normal contributions into the stock market.

On March 18th for example I lobbed about a hundred hundred ten thousand dollars into multiple tranches in the S&P 500 index. Whereas if I had put down only 20% on my primary residence and carried a 1.4 million dollar mortgage I highly doubt I would have had the guts to invest when the market was falling apart.

I wouldn't have been able to write a logical analysis of calculating a stock market bottom in one of those posts that talked about buying the S&P 500 below 2400. Further if I had had a mortgage on our primary residence that would have meant I wouldn't have sold about a million dollars in stock in 2019 to help pay for the house and cash.

So definitely I would not have had the courage to buy maybe more than five thousand ten thousand dollars worth of stock because I would just be kind of frozen wondering uh-oh too much leverage too much debt going to downturn not a good idea. But here's the thing about not having a mortgage or paying down your mortgage debt.

It's not just feeling good sleeping well at night it's not just having the courage to invest in risk assets when they're detonating. There are other things that will really benefit from having less debt or no debt. Here are three easy examples I can think of. One, the courage to quit your job.

If you've got no debt you won't tolerate all the BS at work. If you've got a bad manager or backstabbing colleagues you'll just say you know what screw you guys I'm out of here. Well hopefully you do so in a nice way where you negotiate a severance you get a severance you get $600 more a week in enhanced unemployment benefits and so forth.

Trust me folks when you've got debt you've got responsibilities and all that it's much harder to quit. Okay two, if you have no debt you have more courage to start a business. Most people don't want to start a small business because they don't have an idea, they don't have the funds, they don't have the time, they fear rejection and so forth.

It's just endless excuse after endless excuse but thanks to the internet the cost to start has gone way down. Thanks to the pandemic you are locked down you've got nothing else better to do and you can be on the internet all you want. If you have no debt and low startup costs then your courage to start goes way up.

And then finally you have the courage to break up. Break up from a bad relationship. Let's say you're saddled with debt and you have an unstable job despite hating your partner, despite your partner verbally and maybe physically unfortunately abusing you, you stay in your loveless relationship for the financial security.

How sad is that? But you know, you know that that is true. It's true among society because relationships are complicated and money is important. So if you have no debt and you have your finances in order you can break free from your relationship and find happiness elsewhere. So in conclusion I say pay down debt sooner rather than later.

You're gonna feel better, you're gonna gain more courage, you're gonna have much much more flexibility. Thanks so much everyone for listening. Stay safe, keep tight and if you like this episode and other episodes I'd appreciate a positive review and feedback. Take care.