Tuesday, February 28, 2012

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.


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

  2. 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.

    1. @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.