Paid off our 30-year loan in 7 years over 14 years ago and never went into a penny of debt again.
My parents could have paid off their mortgage ten times over but never did.
There is a certain mentality that thinks debt is a financial strategy.
To me, debt is danger. Savings is safety.
Used to be a lawyer Robert Bruss who talked about beng house rich & cash poor. He’s since passed away but he wrote a weekly column talking about the dangers of having your majority investment as your house. This was back in the 90s and reverse mortgages became popular.
Fixed-rate debt is a hedge against inflation. When the value of the dollar declines, you are paying off your debt with cheaper dollars.
Think of it this way. Debt allows you to use the dollars you borrow now when they are worth something, and pay them back later when they are not.
“To me, debt is danger. Savings is safety.”
It depends. If the interest rate on the debt is below the *actual* inflation rate, then debt can be an asset. You can buy something you need before its price goes up by more than the interest on that amount of debt.
Also, although savings used to be safety, given recent government trends, it’s becoming a target.
If you are careful and disciplined, it actually IS. Two aspects of personal finance that are rarely understood by people who aren't experts are diversification and liquidity. You may think debt is danger, but there's also a lot of risk in having your net worth tied up in a single asset in one location that generates no investment income and can't be easily liquidated in the event of an emergency.
Think of it this way ...
If you have a $300,000 mortgage with a 30-year term and an interest rate of 5%, your monthly mortgage payment would be about $1,610.
Paying that mortgage off in seven years requires a monthly payment of about $4,240. That's an extra $2,630 you are paying every month for seven years to pay that loan off. After seven years you have a home with no mortgage, while your extra payments may have been able to generate a better return than 5% if you did something else with the money. An S&P 500 Index Fund, for example, would have yielded an average annual return of around 9% for the seven years that ended on July 31st of this year.
And even if you invested in something much more conservative than that, you still would have reached the end of Year 7 with a lot of flexibility in your financial position. If you had stuck the extra $2,630 in the bank every month and earned an average interest rate of only 1%, you'd reach the end of Year 7 with a mortgage balance of less than $264,000 and more than $230,000 in the bank. Your margin of safety here is enormous compared to a scenario where you pay the mortgage down to $0. What happens if you lose your job after Year 7? Will you have sufficient cash reserves to carry you for a while, or will you be forced to sell your home just to pay your bills?
If you carry out this process after Year 7 -- and this is assuming an average return of only 1% on the money you are saving, mind you -- your cash balance will exceed the remaining balance on the mortgage before you get to the end of Year 8.
The key point to remember here is this: Once you pay down a loan you can't get that cash back very easily if you need it later, but if you build up cash in parallel to your loan payment process then you will maintain a high degree of liquidity in your assets.