I have often written about the benefits of becoming debt free. In fact, last month I listed 20 good reasons to pay off your home mortgage. Whenever I write about becoming debt free, I get mail informing me that being debt free is a stupid idea. They say things like “I can invest my money and earn more interest than I’m paying on the mortgage, so it would be stupid to pay off my mortgage.” One said, “anyone who would pay off their low interest mortgage is either broke or stupid.” I happen to be neither and have not had a mortgage on my house for 24 years.
(Check out my latest podcast with Jim Dahle of The White Coat Investor. We discussed how I retired early, the concept of enough, and my latest book, The Doctors Guide to Finding Joy in Your Work.)
Those who resist paying off their mortgage have two underlying thoughts.
1) I will have more money in the bank 30 years from now if I keep the home mortgage.
2) The only benefit of paying off the home mortgage is to feel good.
Those who believe the second thought, don’t believe the validity of any of the 20 benefits I listed in my prior article to pay off a home mortgage.
It is a big mistake to go through life thinking all decisions should be based on what will create a larger bank balance in 30 years, and that no decisions should be made simply because we might feel better because of it. To these people, money seems to be the only thing that matters.
What if these same people really did live their lives by the philosophy they use to justify never paying extra on their home mortgage? As you will see, it sounds very silly when applied to other expenses. (Keep in mind your home is an expense, not an investment.) When we weigh the benefits of not paying for something against the future value of our bank account by investing that money instead, ignoring other reasons for paying the expense, we often make a big mistake.
Let’s take a look at how much money would be in our investment accounts if instead of spending our money on these expenses, we invest it for 30 years at an 8% annual return.
Taking a vacation
Vacations are expensive and our income production comes to a halt while we are gone. A typical nice family vacation for a physician might cost $10,000 in direct expenses plus the loss of some of our year-end bonus because of the lack of production during the vacation.
That $10,000 wasted on a vacation, which is solely to make you and your family feel better, would be worth an extra $109,357 in the bank in 30 years, not counting the amount of lost production. If we take three of these vacations a year, that is one third of a million dollars lost from just the first year.
Why would any sane person ever take a vacation, since it reduces our retirement net worth by millions of dollars?
Giving to Charity
If we were to give a total of $10,000 a year to charities we support, it will cost us another $109,357 in lost future net worth just in the first year. Using the same logic people use to avoid paying off their homes would lead them to never give anything to worthy causes. Afterall, don’t we do it to feel good or to help others? It’s our money so shouldn’t it all go to helping only our family? That’s what Scrooge thought.
Private school for our kids
Sending kids to private school is very expensive. I have heard many people say it costs them $20,000 a year per child. That is a loss of future net worth of $218,714 per child for only the first year of private school.
With a free option available, public schools, why would anyone ever give up a multi-million-dollar net worth to pay to send their kids to school. How much better can a third grader learn math at a private school anyway? If all we look at is the money we will have in 30 years, no one would ever make the silly and expensive mistake of sending their children to private schools.
Going out to the movie theater
Going to the movie theater and having popcorn and drinks on a family outing can easily cost $100 each time. That would be a future loss of $1,093 for every movie viewed on the big screen just that first year. That same premier film will be available to watch in a year or so, for no additional charge, on one of the channels we are already paying for at home. That is if we already made the financial mistake of paying for television channels. Please don’t make the silly mistake of spending money on family outings. Stay home and play cards so you can boost your future net worth.
Playing golf
Some hobbies cost a lot of money. Golf is one of them. It would be easy to spend $75 a week playing golf, which is $3,900 a year. That silly hobby costs $42,649 in future net worth for just the first year played. That is a big waste for the privilege of hitting a little ball into a hole that is entirely too far away.
This ridiculous list can go on and on: Replacing perfectly good cars every few years, paying for our kids’ college education, upgrading our cell phones that still work, providing music lessons for our kids, moving to a larger home from our starter home, buying a ski boat, letting our kids play rec league sports……
When there is something we would like to do, we seldom calculate the difference that choice makes to our net worth thirty years into the future. We decide we would like to do it, and then we do it. If you feel like you want to become debt-free, then do it. Don’t play interest rate calculating games trying to convince yourself what the “right” financial choice is.
Rationalizations one and two listed above are not actually about our future net worth. They are about justifying why we spend more than we earn and use borrowed money to finance a higher lifestyle and a bigger house.
Next time you find yourself justifying a purchase of a personal item (home, car, vacation, private school…) using credit, and trying to convince yourself it is not “the smart money move” to pay it off early, or to pay cash, go back and reread this article.
The smart money move we should all be making is to establish a lifestyle that is not dependent on debt. A lifestyle we can afford from the money we have earned and saved.
Make your pattern in life to: Earn – Save – Spend.
Never live with a life pattern of: Borrow – Spend – Earn enough to make the loan payments.
Don’t try to justify why it is better to live your entire life in debt. Do the things you want to do and can afford to do without borrowing from someone who has money.
It is time we all stop managing debt and start eliminating it.
For more information on this subject pick up a copy of The Doctors Guide to Eliminating Debt and stop the debt cycle in your life. It will likely improve the lives of many future generations as they follow your example. In my family, several generations have lived debt-free, by following the examples of their ancestors.
What debt habits are you teaching your children?
Cory,
Thanks for sharing. I especially liked this and shared it with my adult children:
“Make your pattern in life to: Earn – Save – Spend.
Never live with a life pattern of: Borrow – Spend – Earn enough to make the loan payments.”
Thanks,