Get new posts by email:
  

Second Look: Paying off the Mortgage

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.

In a post about controlling spending by creating artificial scarcity, I wrote the following in response to a reader comment:
“When I first had a mortgage, my wife and I used to save more than 50% of our income, but we put it all on the mortgage by doubling all payments and paying 10% of the original mortgage balance each year. I realize now that I would have been better off to have invested some of this money, but I didn't know that at the time.”
Based on the information I had available at the time, I now think I did the right thing by paying off my mortgage aggressively. With the benefit of hindsight I now know that my income grew considerably from those early years and that stock returns were strong through the 1980s and 90s, but I couldn’t have predicted these facts in advance with sufficient certainty.

Paying off debt is a great way to reduce financial risk in your life. For all I knew, maybe the world would stop demanding the kind of work I did, or that my health would fail. This didn’t happen to me, but if my career had followed the path of one of my family members, I would have regretted building up debt and counting on future income to bail me out.

Any analysis that shows the benefits of taking on debt must necessarily assume a fairly rosy picture of future income, or at least not a dismal future. Keeping debt to a minimum is a great way to give yourself some downside protection.

On the Positive Side …

Here are a few of my older articles that I still quite like:

A game show reveals your risk aversion and helps us to examine Morningstar mutual fund rankings. In another post, I explained more about the risk aversion levels baked into Morningstar’s rankings.

A simple idea for making mutual fund fees clear.

Mutual fund Deferred Sales Charges (DSCs) are not much different from front-end loads when it comes to using your money to pay your advisor an up-front commission.

Absurd consequences of the asset allocation theory of constant relative risk aversion.

A market timing experiment shows that a market timer has to be right about 60% of the time to break even with a buy-and-hold investor. This rises to 63% in a taxable account. Things don’t get any better when basing market timing decisions on recent stock movements.

<< Previous Post Next Post >>

Comments

  1. Saving moneyFebruary 28, 2012 at 8:58 AM

    The past is the proof for the same! Saving money is ensuring a better future!

    ReplyDelete
  2. Mark WolfingerFebruary 28, 2012 at 11:53 AM

    One easy approach is to ask yourself: Would you be pleased to see your savings grow at the mortgage interest rate?

    If the answer is yes, then pay down that mortgage.

    ReplyDelete
    Replies
    1. Michael JamesNovember 15, 2016 at 9:33 AM

      @Mark: A very long delay in replying, but I don't think your test makes sense. If I had encountered big problems like bad health or job loss or both, my debt would have become higher-interest debt. Paying down my mortgage wasn't about return expectations in rosy scenarios. It was about making my life better in the event that things went south.

      Delete

Post a Comment

Popular posts from this blog

Financial Lessons from Poker

Common advice about controlling spending is to track all your purchases and add them up each week or month. I believe that this is effective, but have been fuzzy on why it seems to work so well. Why can’t people just spend less without the constant reminder of how well they are doing? I got some insight on this question from, of all places, poker. For poker players there is a certain thrill to dragging in a pot of chips. The thrill is there whether it is a $1 pot or a $10 pot. The $10 pot gives a bigger thrill, but not 10 times bigger. Similarly, losing a $10 pot feels worse than losing a $1 pot, but not 10 times worse. This leads to some players playing in such a way that they maximize happiness by taking in many small pots, but losing some big ones. As long as they don’t count their dwindling chips, they can actually be happy playing this way. Counting your chips is a lot like adding up your spending at the end of the month to see what happened. You may feel good about ...
Read more

Are Financial Advisors the Solution or the Problem for Older Investors?

As investors age, two things become increasingly apparent: they need more help with their finances and investments, and they’re more vulnerable to financial exploitation.  Depending on who you listen to, financial advisors are either the solution to these problems, or they are part of the problem. On one hand, financial advisors and their firms like to sow self-doubt in the minds of do-it-yourself investors.  “Will you know when you’re no longer competent to manage your investments?  What will happen to your less financially savvy spouse if you pass away first?  You’d better hire a financial advisor while you’re still able to make good decisions.”  This paints a picture of competent and honest financial advisors stepping in to save their clients from themselves as they age. On the other hand, we have Ken Kivenko’s Financial Self-Defense Guide for Seniors .  Ken is a tireless advocate for Canadian Investors, and his guide is largely designed to help seniors ...
Read more

Even Dimensional Fund Advisors Struggles with Inflation Statistics

Inflation is a risk we have to face in financial planning, particularly in retirement.  We need to measure inflation risk correctly to be able to make reasonable financial plans.  The best guide we have to the future takes into account past inflation statistics.  But the field of statistics is full of subtleties, and even Dimensional Fund Advisors (DFA) can make mistakes. DFA creates good funds, and their advisors tend to do good work for their clients.  I’d prefer to find errors in the work of a less investor-friendly investment firm, but they provided a clear example to learn from.  They misapplied a statistical rule, and as a result, they misinterpreted the history of inflation over the past century. I discussed this issue with Larry Swedroe in posts on X.  I respect Larry and have followed his work as he tirelessly explains evidence based investing to the masses. A Simple Example To explain the problem, let’s first begin with a simpler example.  So...
Read more

Archive

Show more