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\"I know what the math says, but….\"

Home Personal Finance and Budgeting \"I know what the math says, but….\"

  • Zaphod Zaphod
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    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    With the new blog post there is a lot of the above line stated in one way or another. There are additional similarly baseless arguments like liquidity/cash flow and paying the mortgage due to state of the market. And of course the oldie but goodie “guaranteed return”.

    I am 100% okay with people choosing to pay debts or whatever they choose to do. I simply dislike the half-truths and outright misconceptions people use to do so. Whats the larger issue is that people who probably do totally understand the trade offs, like WCI, end up using above aphorisms and people that do not fully understand pick it up and use it as their justification unknowingly. I wish that werent true but lets be honest, it is.

    Paying off a debt either with larger payments or lump sum does not increase your liquidity. If lump sum it just reverses it from all at once to over time and changes where that money is located (both on the balance sheet and sometimes physically), ie, in a liquid place like a bank account into an illiquid one like your home. If the more aggressive approach it does nothing until the debt is fully paid. A more visual math example:

    Example Lump Sum

    Lump Sum=100,000

    Debt payment= 1,000/month. 100k principal.

    If you take your 100k and pay off the debt you do not “gain” any liquidity. You already have that liquidity in a big lump sum. You have 100 forward months of liquidity in the bank account right now. You are simply trading it for a payment of 1000/month going forward. You already have months/years of future liquidity on hand, youre simply trading off how its given to you. In the same comment stream people complain of escrow accounts of minimal value as giving “free money” to the bank, yet overlook the whole mortgage value as the obvious exact same kind of transfer.

    Net result is negative given inflation and time value of money. 100k right now is worth more than 1k/month for the next 100 months. This is like why its more valuable to take the lump sum winnings in the lottery or why lump summing money into the market almost always wins long term. Same principle. Not a good reason to pay down a debt.

    Money is fungible, simple vs. compound interest, and time value of money. These concepts cannot be stressed or learned enough, and even on this very enlightened forum we have seen it misunderstood time and time again.

    Paying due to market state and not being able to pay your mortgage/bills

    If being able to pay your mortgage is dependent on a typical bull/bear market state and not a depression/GFC level issue, than you cannot afford to own a home plain and simple or are too leveraged in general. This is simply a justification, not an argument.

    “The math says, but…”

    To me this is analogous to a pt saying, “I know what the doctor says, but…”. How is it different and what are your initial thoughts about your patient that says such a line?

    Why do we give ourselves such a pass and hold everyone else to such standards? How many people actually know the math they purport to have disregarded?

    Guaranteed return

    It is not a return. It does not grow. It is a fixed known quantity that is decreasing in value over time. You can only avoid the finance charge and only once. The best you can do is pay with cash. That comes with the standard opportunity costs that you would normally run. The difference with any debt is basically that same calculation plus the finance charge.

    Simple/Compound Interest

    Loans are simple interest. Market returns are compound. They cannot be compared straight across and when thats done it simply demonstrates a lack of understanding of the math and differences or willful spreading of such misinformation. Implications of this misunderstandings are huge.

    Short term thinking

    Comparing two long term issues like mortgage and retirement investing (if younger, obviously things change dramatically near retirement) to very short term issues like a correction or bear market. Its even more serious for short vs long term issues like student loans vs. retirement. Once the loan is gone that early choice to invest can compound for decades longer, decades.

    Unless retiring soon, none of this should matter at all, and definitely have zero bearing on any of your debt/invest decisions. If you put into the market instead of the mortgage and the market goes down shortly thereafter it does not mean it was a bad decision nor will it impact which turns out to have been more wealth positive in the future. Its a red herring and exactly the kind of thinking this site should be trying to teach its readers to stop doing. Any thinking like this should line up with your personal timeline, expenses, etc….We should be thinking about terminal wealth and long term goals, not justifying behavioral issues with short term explanations that are wholly incongruent to the rest of the message (long term, no short-termism, etc….) If we are not to be concerned with let alone sell stocks in a down turn, why do we worry about other such frivolities?

    Peace of mind, priceless

    AH! As I’ve tried to point out time and again this is nothing more than an aphorism that sounds nice. Its not true, they do have a cost and we can get near to the exact dollar of the price. Sure its easier if you simply dont look for it to work out as such. Dont invest or make big life decisions based on pithy quotes, its irresponsible.

    The White Coat Investor The White Coat Investor
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    Status: Physician
    Posts: 4656
    Joined: 05/13/2011

    So…on the continuum between behavior and math, you’re way at the right end?

     

    Also, I think it is important to realize that paying down a load, at least until it is paid off, compounds in the exact same way as an investment because a larger portion of the next payment goes toward principle. That’s easy to see with a financial calculator. Now obviously if the interest isn’t calculated based on the entire balance of principle + unpaid interest as in some student loans, that’s not the case. So paying down debt absolutely does provide a guaranteed return, at least until the debt is gone.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #54668 Reply
    Liked by Tim, FutureDoc, Craigy
    Zaphod Zaphod
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    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    So…on the continuum between behavior and math, you’re way at the right end?

     

    Also, I think it is important to realize that paying down a load, at least until it is paid off, compounds in the exact same way as an investment because a larger portion of the next payment goes toward principle. That’s easy to see with a financial calculator. Now obviously if the interest isn’t calculated based on the entire balance of principle + unpaid interest as in some student loans, that’s not the case. So paying down debt absolutely does provide a guaranteed return, at least until the debt is gone.

    Click to expand…

    Not necessarily, but at this current time.

    What I am really getting at is actually talking about things and representing them in a more truthful manner in regards to what your choices are. Basically being more precise with our language. Its not so much what one actually does. This is more in the context of those that read more superficially (aka most people) and act on simply on a distilled take rather than assessing their choices. Almost a fiduciary type of view of it. So many people read these kinds of sites and mostly just hear the crowd say, “kill the debt, its the best”. While not bad advice and even better for most non doctors, its not exactly the whole story. There are real costs involved. For everyone that isnt a crazy personal finance type like us on the site, they may take things at face value an assume its the overall best way to grow terminal wealth. These axioms and pithy statements get quoted so often they have basically become a priori truths and are unassailable and hardly questioned.

    Some people have been aggressively doing so over the last 5 years or so and missed out on 215% in gains that cannot be recouped save some sort of collapse, a mountain of cash in the bank account at the time, and the courage to then invest it at that time. Which given what could be easily described as their overly cautious nature, is highly unlikely to occur. Its more likely to be taken as proof positive of their conservative ways. Most will not actually do the math to see how far behind they are from the other choices they could have taken.

    Again, I think a lot of the differences boils down to stage, and what applies at one end makes little sense at the other.

    #54672 Reply
    Avatar Complete_newbie
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    Earnest refinancing bonus

    ha!

    I haven’t logged in a while, but when I do…

    And I’ll be upfront; many of the articles have repeated emphasis on basic concepts (makes sense only so much to talk about) or some cheerleader in some other thread talking nonsensical about WCI merchandise. Thus, this has me NOT really returning to this site. But anyways…

    People like simplicity. Paying debt is simple. It relieves “Stress”, you know, owing things is not in our primal nature. I bet a study done on endorphin release post pay off >>>> than having debt.

    BUT

    However you slice it, Zaphod speaks the truth. To get to this truth requires knowledge, guts, business acumen all of the above. WCI has often quoted personal finance as “super power”…yea thats not true. Personal finance the way WCI talks and other umpteenth bloggers talk about is not that difficult. The real superpower is understanding how to manage debt to max profit or entrepreneurship (which requires knowledge about DEBT, cash flow, accounting, marketing etc etc).

    I for one will probably forever be in “debt”. Why not borrow to max profits? That is easier for me than starting a blog about personal finance to augment my income. Money works for me.

    Figure out your margin of safety and use debt.

    Still, killing debt is not bad, its just the classic MD thing: conservative, slow and steady, eventually you’ll be fine. You will be. Choose this option if you don’t really care much about moving money around this and that and are ok with retiring late in your career. About 3 years ago I was just like this, till I started a business or two and a whole world of opportunity cost/opportunity opened up to me. Doing prescription personal finance is great, it is just that you’ll be good to go (whatever your number is) likely in your 50s. Don’t know about others, but I’d like to ski and dance and run around with my younger knees and not with arthritis. For me Time is important and for that I will use debt to get to FI faster. For a dude, I am reaching peak or just past it. You get the idea.

    its not behavior and math as polar ends but behavior AND math all the time – together. You need math and your steadfast behavior to match FTW.

     

    #54681 Reply
    Avatar KJF – TheChapelHillFinancialAdvisor
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    Status: Financial Advisor
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    Joined: 07/17/2017

    Zaphod,

    I agree with most of what you said about and I applaud the effort towards getting at the truth.

    Couple of thoughts:

    1. It seems like much of your thoughts center on very long-term terminal wealth argument.  Two thoughts:  #1.  is this right for everyone?  and #2.  Some of the mathematics you are quoting are trivial over short periods of time.

    2.  All wealth arguments must be passed through a utility function.  The marginal utility argument we all know so well, is not the same for everyone.  I will admit this point is not congruent with my point above.  But it is not either/or.  They both co-exist.  One man’s trivial is another man’s life savings.

    3.  Mass communication is difficult.

    4.  Short efficient communication is more difficult and time consuming than long form communication.

    Given these realities,  I think the work on WCI is some of the best on the net.  I can see your argument, but wonder if we are getting “lost in the weeds”.  (Could not help with one more catch phrase!)

    I have enjoyed thinking about your post.  Time to get back to the real jog however.

    Kent

     

     

    Kent Fisher, CFA - Old Peak Finance - Chapel Hill NC.

    [email protected]

    #54685 Reply
    hatton1 hatton1
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    Status: Physician
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    Joined: 01/11/2016

    I agree with Zaphod about that some people are missing out on a great bull market by focusing on mortgage payoff.  No one knows how long before it ends.  Those of you who are between 30-45 this is when you invest for your foundational nest egg and let the power of compounding work for you.  I always maxed out my tax favored accounts but continued to stuff the taxable with every dollar I could. If you do this you will be amazed at much unearned income you can make.

    #54688 Reply
    Liked by Tim, RocDoc, Zaphod
    Avatar StarTrekDoc
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    Joined: 01/15/2017

    Newbie falls squarely in the “King of Debt” pot, which would be a graduate 500-600 level class;

    Unfortunately America isn’t there and stuck in Finance 101 — balance your checkbook; get out of debt.

    Majority of people on this board are 200-300 level and trying to get to 400 level savings and healthy retirement in a stable, low stress manner — KIS Boglehead style.

    A small number would be where Zaphod lives at the cutting edge of maximizing/max leverage of the dollar.   Whether it be from debt repayments/mortgages/real estate/options.   All these are variations of leveraging your buying POWER.  Where you let your $1 worth work as if it’s $5.  The math works out with leveraged investments and people like our current President can go from broke to BILLIONS by doing leveraged investments properly structured and in isolation.

    Again, that’s a small number of people for that cutting edge and would be very hard to teach/learn on a forum.  The negative experiences will easily drown out the positives cause it’s hard to be successful at this without failing several times.   It’s like the resume of MDs vs VCs.   VC resumes actually are happy to show repeated failures in business even to a 10:1 ratio.  they were successful in that 1!   If MD showed ten employers every 2 years, will never find a job.

    All said, leveraged investment IS a thing that quite a few 40yo+ high wealth income people in here should talk about.  It’s the next level after passing the FI mark.

    #54690 Reply
    Liked by RocDoc, Zaphod, Craigy
    Avatar MaxPower
    Participant
    Status: Physician
    Posts: 374
    Joined: 02/22/2016

    With the new blog post there is a lot of the above line stated in one way or another. There are additional similarly baseless arguments like liquidity/cash flow and paying the mortgage due to state of the market. And of course the oldie but goodie “guaranteed return”.

    I am 100% okay with people choosing to pay debts or whatever they choose to do. I simply dislike the half-truths and outright misconceptions people use to do so. Whats the larger issue is that people who probably do totally understand the trade offs, like WCI, end up using above aphorisms and people that do not fully understand pick it up and use it as their justification unknowingly. I wish that werent true but lets be honest, it is.

    Paying off a debt either with larger payments or lump sum does not increase your liquidity. If lump sum it just reverses it from all at once to over time and changes where that money is located (both on the balance sheet and sometimes physically), ie, in a liquid place like a bank account into an illiquid one like your home. If the more aggressive approach it does nothing until the debt is fully paid. A more visual math example:

    Example Lump Sum

    Lump Sum=100,000

    Debt payment= 1,000/month. 100k principal.

    If you take your 100k and pay off the debt you do not “gain” any liquidity. You already have that liquidity in a big lump sum. You have 100 forward months of liquidity in the bank account right now. You are simply trading it for a payment of 1000/month going forward. You already have months/years of future liquidity on hand, youre simply trading off how its given to you. In the same comment stream people complain of escrow accounts of minimal value as giving “free money” to the bank, yet overlook the whole mortgage value as the obvious exact same kind of transfer.

    Net result is negative given inflation and time value of money. 100k right now is worth more than 1k/month for the next 100 months. This is like why its more valuable to take the lump sum winnings in the lottery or why lump summing money into the market almost always wins long term. Same principle. Not a good reason to pay down a debt.

    Money is fungible, simple vs. compound interest, and time value of money. These concepts cannot be stressed or learned enough, and even on this very enlightened forum we have seen it misunderstood time and time again.

    Paying due to market state and not being able to pay your mortgage/bills

    If being able to pay your mortgage is dependent on a typical bull/bear market state and not a depression/GFC level issue, than you cannot afford to own a home plain and simple or are too leveraged in general. This is simply a justification, not an argument.

    “The math says, but…”

    To me this is analogous to a pt saying, “I know what the doctor says, but…”. How is it different and what are your initial thoughts about your patient that says such a line?

    Why do we give ourselves such a pass and hold everyone else to such standards? How many people actually know the math they purport to have disregarded?

    Guaranteed return

    It is not a return. It does not grow. It is a fixed known quantity that is decreasing in value over time. You can only avoid the finance charge and only once. The best you can do is pay with cash. That comes with the standard opportunity costs that you would normally run. The difference with any debt is basically that same calculation plus the finance charge.

    Simple/Compound Interest

    Loans are simple interest. Market returns are compound. They cannot be compared straight across and when thats done it simply demonstrates a lack of understanding of the math and differences or willful spreading of such misinformation. Implications of this misunderstandings are huge.

    Short term thinking

    Comparing two long term issues like mortgage and retirement investing (if younger, obviously things change dramatically near retirement) to very short term issues like a correction or bear market. Its even more serious for short vs long term issues like student loans vs. retirement. Once the loan is gone that early choice to invest can compound for decades longer, decades.

    Unless retiring soon, none of this should matter at all, and definitely have zero bearing on any of your debt/invest decisions. If you put into the market instead of the mortgage and the market goes down shortly thereafter it does not mean it was a bad decision nor will it impact which turns out to have been more wealth positive in the future. Its a red herring and exactly the kind of thinking this site should be trying to teach its readers to stop doing. Any thinking like this should line up with your personal timeline, expenses, etc….We should be thinking about terminal wealth and long term goals, not justifying behavioral issues with short term explanations that are wholly incongruent to the rest of the message (long term, no short-termism, etc….) If we are not to be concerned with let alone sell stocks in a down turn, why do we worry about other such frivolities?

    Peace of mind, priceless

    AH! As I’ve tried to point out time and again this is nothing more than an aphorism that sounds nice. Its not true, they do have a cost and we can get near to the exact dollar of the price. Sure its easier if you simply dont look for it to work out as such. Dont invest or make big life decisions based on pithy quotes, its irresponsible.

    Click to expand…

    You and I had this back and forth a while ago specifically about student loan payoff.  As I’ve thought about it more, I’ve come around more to your way of thinking.  I have a couple of follow-up questions to what you’ve posted here.

    1) At what rate to you, if any, does it make more sense to prioritize loan payoff instead of investing?

    2) What about variable rate loans?  Does that change your thinking at all?

    In regards to #2 above, I had been aggressively paying off my 10-year variable rate loan with an interest rate that started at 2.63% almost 2 years ago but is now over 3.5%.  The rate cap was almost 7.5%, so I prioritized paying it off (balance now is around $2,300 from $145,000).

    My other 2 remaining student loans have interest rates of 4.25% and 2.875%.  I haven’t made a single extra payment to the 2.875% loan, but have been the 4.25% loan on occasion with production bonuses.

    #54692 Reply
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    Donnie Donnie
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    Joined: 01/11/2017

    Zaphod, I agree with the spirit of the post, although I had trouble following all of what you wrote. I posted a couple comments in a similar vein in the comments section.

    I replied to one comment or who gave himself a pat on the back for paying off his mortgage in 2007 rather than putting it into the market before it crashed.

    First, this kind of results oriented thinking neglects whether the decision was actually correct. No one can know the future with certainty, so the only way to make a decision is to analyze scenarios and probability weight them to come up with an expected value. This is too hard for most people, so they end up falling back on rules of thumb or feeling rather than actually quantifying the impact of decisions.

    Second, even with the benefit of hindsight, the decision was likely a bad one. When one does actually “do the math” on that trade, one discovers that the poster gave up an 8% annual return and a 141% total return.

    The truth is that debt, if used properly, increases returns, but also increases volatility of returns. As you get closer to FIRE and older, increasing volatility for returns may not be something you are interested in anymore. I have thought about taking the time to quantify things like paying of a mortgage and documenting them in a blog or some other way, but it is time consuming, and I’m not sure there is a market for it.

    #54693 Reply
    Liked by RocDoc, jz, Zaphod
    Craigy Craigy
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    Semantics

    Zaphod, I think you’re getting too hung up on the semantics of “guaranteed return.”   🙂  Paying off debt absolutely provides you a benefit, the benefit of not having to make future payments, and the “return” is the benefit of not having to pay interest.  Take business 101 and look up the definition of an asset and a liability.  Take accounting 101 and you see that adding to or subtracting from either side affects your bottom line the same way.  You are hung up on the idea of “guaranteed return” being false because you literally don’t receive any return, i.e., any money or appreciation, like you would with a stock, bond or lemonade stand.  I appreciate using the right word to describe things, but to suggest that there being no return means there is little or no value to paying off the debt is incredibly short-sighted.  Having a debt paid off or receiving cash can both be a return.  Paying off a debt doesn’t technically give you a return, but not having to pay interest affects your bottom line the same way.

    If the key to successful investment and wealth building is getting your semantics correct, then we should be able to extend this out a bit, right?  Let’s assume Jimmy Carter is president and mortgage rates are 20%.  You’re borrowing $1M against your house at 20% to get all of those sweet, sweet market returns, right?  Why would you ever pay off the mortgage, as that’s not going to give you any return, right?  And he who has the most returns at the end of the day wins, right?  Better to pay a little interest, and collect all of those compounding returns, so that you’ll come out ahead, obviously, right?.    😉

    Liquidity

    Next, the liquidity argument, which comes in two senses.  By paying off your mortgage, your monthly income is more liquid because less of it is earmarked and committed to outflows such as the note payment, period.  If you put the $100,000 cash into the market you also lose the same asset liquidity, and you subject that value to market risk and volatility.  Sure, you could keep that $100k in cash, but I think both of us would agree that holding the entire value of your note in cash so that you can make future mortgage payments is asinine.  And sure, a house, or a paid off mortgage, is less liquid than stock, but neither one of those is cash.  And while you can sell stock with a click and a keystroke, these days you can do the same thing with a refinance or a home equity loan.  You can sell a house pretty easily these days too.  Even stock sale proceeds take time to settle in your account.  But cash flow wise, paying off a loan makes your monthly finances more liquid, no matter how you cut it.

    Compounding

    Now, the compounding issue, and probably the biggest hole in your argument, or at least the biggest mathematical one.  Yeah, we know that an investment in the market offers a compound return, and a home loan is simple interest.  But that doesn’t magically mean that you miss out on some benefit of compound returns by paying off a mortgage.  All the additional money you’ll have in your pocket compounds too, assuming you take the interest you’re not paying and the payments you’re not making, and roll that into the market.  You can’t borrow money at X% and somehow make money getting a return at X%, even though your investment compounds while the loan does not.  Please, I would love for you to show me the math where, due to “compounding,” you somehow split the baby with interest and returns at X%, roll it forward Y years, and put back together a bigger baby in the end.

    Yes, we know that the expected return of the market right now is a better rate than your mortgage rate (well, hopefully).  But that comes with far less risk. One rate is, in fact, guaranteed, while one is not.  And even though the math and the stats tell us that ultimately the market will win, the risk is such that we can’t simply go down to the US Treasury, take a trillion dollar loan, and let it roll in a Vanguard 500 index.  Perhaps your entire net worth is rolled into crude oil futures or frozen orange juice  😛 , but most prudent investing would have you diversify your portfolio into riskier and less risky assets.  Now, there’s a great argument to not being over-allocated in safe, low-yield investments (such as CDs, bonds or a paid-off house), but as long as your home doesn’t represent the bulk of your net worth, losing a little expected return is an acceptable part of a diversified portfolio.  I know the math says I should be 100% invested in S&P 500, but it’s not a bad idea to have some other lower risk, lower reward assets as well.

    Some Anecdotes

    Finally, in my line of work I get to peer into a lot of personal financial statements, and in my anecdotal experience, by and large, people with real wealth don’t have their homes maxed out so that they can keep a few more dollars rolling in the market or in their business.  Again, in my anecdotal experience, the people out there I personally encounter who are the biggest advocates of carrying more debt so that you can leave more money in the market always seem to be the guys who are in debt up to their eyeballs, some small business owner getting by by the skin of his teeth, living to or above their means and never really have their shit together, but think they’re smarter than everyone else.  Either that, or they’re a broker or fund manager, in which case, they’re the guy having a heart attack every time there’s a big bump in the market.  Zaphod, I’m not saying you’re one of those, but I don’t think it’s a coincidence, and for every guy like you there’s ten other guys out there who say the same thing but never really have anything to show for it.

    In the end, the math says to take all of the risk, but it’s not a bad idea to only take some of it.   🙂

    LEVEL 1 WCI FORUM MEMBER.

    #54699 Reply
    Avatar StarTrekDoc
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    Craigy, there’s space between aggressive and extreme.

    If one is in a growth S+P right now; one could easily argue that’s pretty aggressive on this long bull run that we’ve had.   Extreme would taking a call option contract on Tesla today and funding that with a 80% leveraged real estate fund that you just took out.

    There’s something in between.

    I would HOPE the well to folk who are similarly in my shoes here:

    40s –  529s funded; pretax funded; healthy taxable fund, and diversified Real Estate — wondering whether to payoff the mortgage vs more aggressive leveraged investing since 10-15+ years of income stream still pending and a nice payoff would be the difference between really nice RE or cushy jetsetting in first class vs eco. — all first world problems.

    I would HOPE that most of us in the 40s+ and future 40s+ have conquered or plans on the 100-400 level issues and struggle with the excess and ‘what-to-do’.

     

    Also, this isn’t 70s;  Most folk have mortgage rates in the 3-4%.  Paying that off is low return vs the risk at 20% of the Carter era

     

    #54701 Reply
    Donnie Donnie
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    Craigy, I also agree with much of what you wrote. Arguing symmantics takes away from arguing the merits.

    That said, the math doesn’t say to take all of the risk as you conclude or to lever yourself up to 3x net worth. The argument isn’t that if some leverage is good, all you can get must be the best. That’s a mistake in logic that can only be corrected by actually doing the math, and what I think is the point Zaphod was trying to make, albeit without actually doing the math.

    #54703 Reply
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    Zaphod Zaphod
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    Splash Refinancing Bonus

    Okay, some clarification.

    maximizing/max leverage of the dollar

    Click to expand…

    I am not arguing to “max out debt”. Not at all, not even a little bit. Im simply arguing we be a tad bit more honest. Not for me or anyone else that knows these things, but for the casual reader or new reader that will take it as a given fact and maybe structure their life around it initially. They take it, repeat it and all the sudden its indisputable fact. This results in a large proportion of people espousing things that dont have a great understanding of it in reality.

    All of these anti debt is obviously the best posts are full of personal opinion and it should be stated as such a bit more strongly than lip service to a pithy quote. Even if I had zero debt or was in all bonds, it would not change the underlying truth of the argument. Thats my only point. Again, not an endorsement to margin your life out, and I do not get why people always make that logical leap. Remember also that as long as you arent out there blowing the money and are saving it in some form, you will always have the choice to just knock out debts. No one gives you that option and a time machine for savings.

    Paying off debt absolutely provides you a benefit, the benefit of not having to make future payments, and the “return” is the benefit of not having to pay interest.

    Click to expand…

    I am arguing to discuss it realistically and not throw about terms like “return” on loan payments. You are avoiding a fee. Thats it. I am not hung up on the term for myself, I fully understand the differences and the value it can bring. I am hung up on people that do understand it explaining it to those that dont as such which may cause them to look at the trade offs in a way that isnt real and maybe cause them to do something they otherwise wouldnt have, or may later regret. Let the person choose for them selves given the actual true information and have them see how it fits into their life goals. For example, almost no one espousing said benefits mentions the cost for the benefit and it is real and should also be discussed.

    I mentioned that all of this is on a spectrum and absolutely depends on age, the younger you are the more important investing is, the older and closer to retirement the less any of those dollars compound. Its not the same rx for everyone. Its the new grads that will benefit most from investing now and not putting that off for mortgage, etc…even if there is a horrible bear market.

    Adding to either side of the balance sheet does not proportionally increase the overall when time is then considered. Thats the whole point of investing, increasing purchasing power beyond that of inflation.

    By paying off your mortgage, your monthly income is more liquid because less of it is earmarked and committed to outflows such as the note payment, period

    Click to expand…

    Your liquidity argument makes no sense. If you have 100k why not in cash? Its exactly what you are doing by paying the mortgage. If holding it in cash makes no sense, the same goes for the mortgage. A mortgage is a currency hedge and you are effectively short the dollar.

    Again, if you have 100k, you can cut it up to supply that liquidity monthly. It is functionally zero difference. Money fungible. Its also not liquid until paid off either, you’re actually decreasing liquidity until then. Unless you have a lump sum which brings us back to the start. Paying it off is going long the dollar, aka, holding cash.

    But that doesn’t magically mean that you miss out on some benefit of compound returns by paying off a mortgage. All the additional money you’ll have in your pocket compounds too, assuming you take the interest you’re not paying and the payments you’re not making, and roll that into the market. You can’t borrow money at X% and somehow make money getting a return at X%, even though your investment compounds while the loan does not. Please, I would love for you to show me the math where, due to “compounding,” you somehow split the baby with interest and returns at X%, roll it forward Y years, and put back together a bigger baby in the end.

    Click to expand…

    If one has a finite amount of dollars and is choosing to put it towards say a mortgage than those dollars cannot go to the market. You do not reap the benefit of the decreased interest costs until that whole note is gone. Then one has to account for the opportunity cost in whatever time frame that was. If short, it doesnt matter, if a number of years than it needs to be considered.

    Debt is a tool. It can be used for good, or irresponsibly and lead to bad outcomes. There is a lot of in between in there. I am taking the other side of the coin mostly because everyone else is on the other side. Its a balancing thing, Im one of whatever personalities that at times enjoys taking the contrarian view to whatever is supposed to be a given.

    Dont get me wrong I dont have a single debt I dont pay more than the minimum amount on, and student loans are all on shorter than available terms. Im just saying the doctor, not the average joe mind you, should not worry excessively about what will ultimately be a rounding error in their life. All they have to focus on is income, expenses, shoveling it away and trying not to make big mistakes. I simply enjoy arguing.

     

    #54705 Reply
    Liked by Tim, RocDoc, hatton1, Craigy
    Zaphod Zaphod
    Participant
    Status: Physician, Small Business Owner
    Posts: 6339
    Joined: 01/12/2016

    Craigy, I also agree with much of what you wrote. Arguing symmantics takes away from arguing the merits.

    That said, the math doesn’t say to take all of the risk as you conclude or to lever yourself up to 3x net worth. The argument isn’t that if some leverage is good, all you can get must be the best. That’s a mistake in logic that can only be corrected by actually doing the math, and what I think is the point Zaphod was trying to make, albeit without actually doing the math.

    Click to expand…

    Yes, exactly. I have thought of doing the math and actually have on another site, but as you mentioned it is a ton of work and I simply dont care that much.

    To take all the risk is crazy as well. Its like arguing that if you think going faster than 1 mph in a car is reasonable, go 10,000 mph! Uh, no.

    #54706 Reply
    Craigy Craigy
    Participant
    Status: Spouse
    Posts: 2112
    Joined: 09/16/2016

    Startrekdoc and Donnie, both good points.

    The two ends of the spectrum seem to be:

    • The Dave Ramsian any debt is bad, never get into debt, going into debt is stupid, get out of debt as fast as you can, the borrower is slave to the lender, yada yada yada… or
    • Who cares about debt, take as much as you can, keep it forever, the interest is way cheaper than the average market return, you’re missing out on compounding returns, paying off your mortgage is stupid, etc.

    I agree, somewhere in the middle seems right.  Being an ardent supporter of either end of the spectrum IMO overstates too many of the advantages and ignores too many of the disadvantages of your side, and vice versa of the other.  Being on the former end means you’re ultra conservative, leaving lots of money on the table and otherwise not having as much fun as you could.  If you’re on the latter end of the spectrum you’re probably either in-between bankruptcies or you’re Warren Buffett.  😀  But suggesting that things like cash flow, liquidity, peace of mind, and the idea of a “guaranteed return” are fallacies, baseless, or are otherwise untrue aphorisms is ignoring many realities to blindly put you at the latter end of the spectrum.  And Zaphod is by no means the only guy saying this stuff, it’s a common theme on the blogosphere and in the business world in general.

    LEVEL 1 WCI FORUM MEMBER.

    #54711 Reply

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