A Visual Breakdown of Why Investing Is Better Than Paying Off Debt
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- เผยแพร่เมื่อ 21 ก.ค. 2019
- A Visual Breakdown of Why Investing Is Better Than Paying Off Debt
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I wasn't financial free until my 40’s and I’m still in my 40’s, bought my third house already, earn on a monthly through passive income, and got 4 out of 5 goals, just hope it encourages someone that it doesn’t matter if you don’t have any of them right now, you can start TODAY regardless your age INVEST and change your future! Investing in the financial market is a grand choice I made. Great video! Thanks for sharing!
Very inspiring! I love this.
I understand that tomorrow isn't promised to anyone, but investing today is hard for me now because I have no idea of how and where to invest in. I would be happy if you could advise me based on how you went about yours, as I am ready to go the passive income path.?
@@raychristopher7797 I invest across the top markets but not by myself though. I follow the guidelines of *PRISCILLA DIANE AIVAZIAN* . you might have heard of her. I can correctly say she's worth her salt as an investment advisor as her diversification skills is top-notch, I say this because I see that in her results as my portfolio grows by averages of 20 to 3O% every month, unlike I can say for my IRA which has just been trudging along. my portfolio just mirrors what she places and not just on some particular industries of my choosing. she gave me that financial freedom I needed
@@georgerobinson2021 That’s great, your investment advisor must be really good, I have seen testimonies of people using the help of investment advisors in making them more financially stable. Do you mind sharing more info on this person?
@@raychristopher7797 look her up on the internet with her name. she's quite popular for her services as she was recently featured on
CNN. She can work with anyone irrespective of where you're located
@@georgerobinson2021 I just looked up this person out of curiosity; surprisingly, she seems proficient. I thought this was just some overrated BS, I appreciate this.
I'm in my late 20's and this show is a godsend
That means a ton, Aaron! Thanks for watching.
You threw out Dave Ramseyism. “ live like no one else so one day you can live like no one else” lol well my dad did both his whole life, invest and pay off mortgages. God took him at 64. Life’s a curveball
Tony,
You make a great point. Definitely need a balance of saving for the future and enjoying the journey (warts and all).
At least now he can pass on that house to his next of kin. A person that has a mortgage is not a home owner but a LOAN OWNER.
I enjoyed the show and don't disagree with the theoretical arbitrage between home mortgage rate (current rates) vs historical returns of stock market. However, I have a few thoughts to consider for people watching this:
1. Long term returns will likely be less than assumptions in the video, which means the upside for "boring investor" over 30 years is less vs just paying down the home mortgage.
2. This also assumes the average person wont panic sell when the market corrects, which we know is not the case. I would argue it is the opposite for home owners. They don't panic sell their homes.
3. Non-Financial benefits of less debt. I feel physically better with less debt (i.e. mental health) I would take more way more career risk if I did not have to make the mortgage payment.
I have concluded the correct path is as follows:
1. Have a healthy emergency fund (cash) so you are never a forced seller of either your home or investments.
2. Accelerate the mortgage pay down from 30 years to something closer to 20 years
3. Invest what is left over into a low cost index because the Money Guy is correct in referencing Einstein famous quip; The most powerful force in the universe is compound interest.
The main thing to consider is risk. Otherwise, I like to invest more 😀👍
PMI only works out to be around 1% so if you don't mind paying it then I would invest instead. Just make sure you can get rid of it when the house is paid down and your equity increases.
William Pabon if you're paying 1% for the PMI then it's likely you can make more investing it
William Pabon it's probably worth it to put less down and leave the money in your investments but it's a personal preference
I like somewhere in between... investing 15% income and using the rest to payoff the house by 35, 222k mortgage paid off in about 5 years. Then increase investments over 25%
There is also risk involved in paying off debt. One risk is that you will slide right back into debt...I've done it, and seen lots of others do it. Another risk is that you can miss out on a fabulous deal if you don't have the liquidity to ponce on a deal. One of many other things to consider is that paying off debt will save/gain you a fixed amount, but that investment could double, triple, quadruple...or of course, could go bust. So yeah, everything has a risk to it, even if it may not seem so.
Is the additional interest paid over the full 30 years vs the interest saved when paying it off early factored into the net of each scenario. If that was covered I may have missed that.
Yes it appears to be. After 10 years the mortgage balance is still $189K even though boring investor paid $137K on a $240K loan. The math is right, boring investor ends up with more.
Raise your hands if you're disciplined enough to invest the difference in the stock market every month, without fail, until the mortgage is fully paid off.
🙋♂️- all you need is an auto-investment plan (pay yourself first).
@@MoneyGuyShow robo advisor, auto set a taxable account weekly/monthly (whatever you can manage).
Yeah man. It’s not hard. Just automate it and stop looking at your balance, stick to the plan
Auto withdrawals on paydays, make it simple. Out of sight, out of mind.
If you live below your means, it's not too difficult to max out investments and pay extra to mortgage. Also, these numbers don't represent risk; which is a big factor why many focus on mortgage. Purely by the numbers, you are right.
Right, but the risk is QUICKLY controlled, since by the 10year mark the mortgage can be paid off with the investments with money left in the investments.
Interesting perspective.
Stock market crash-Buh bye cash. Paid off house-Peace of mind.
I would rather have a paid off house.
It is OK to have different financial goals that meet YOUR life situation and risk tolerance.
Stock market crashes are only a problem for those who don't invest long term. In the 100+ year history of the Dow Jones Industrial Average, there is not a single point where the index was not higher 20 years after that initial point. I can see a case where paying a mortgage off earlier would be better, but not for a 30 year old.
@@neutralsportsfan17 As I said, everyone's financial and life situation is different. For instance, an older person who has been through divorce/alimony/child support it would be more advantageous to pay off their house if they no longer have the luxury of TIME. One size does not fit all situations.
With that said, of course continue investing into your retirement fund.
So great we both share a passion for this 💰
Love the content!! It would be am interesting episode to compare this with current home mortgage rates
We have our main retirement income thru my husband's investments. My pension is the Extra fun since we don't want to rely on it. We decided to invest those Extra mortgages payments into a Roth ira IF we ever need it we can pull out the principle and pay off the house. Our mortgage is 15 years at 2.4% and will be paid off naturally by 45 tho so we are in a unique situation
Dave Ramsey is way too old-school for my tastes. I definitely agree with this method.
The problem is, all investments don’t profit
Peace of mind is the most important thing in the world. Not having a house payment is a beautiful thing.
Just hope you don’t have any hiccups while you are prepaying the mortgage debt. Lose your job in an economic downturn... where do you pull assets from to cover the bills. Their is actually more liquidity risk protection with a diversified portfolio then locking the money up inside your house (especially while you are in your 20s and 30s).
@@MoneyGuyShow That was a rude comment. You are no Clark Howard. I have money to pay my bills even if I lose my job. I also can't lose my job. My job has to be done. You should have enough money in cash to pay 6 months of bills. I have a year. You never pull money out of investment unless it's life or death.
Peace of mind is also attained by having more money in your accounts than what you owe. I've been debt free and broke, that did not come with peace of mind. I've been in debt and had plenty of money to cover all eventualities, that did offer quite a bit of peace of mind. Just saying that once your assets exceed your liabilities, those liabilities stop worrying you.
@@jamie49868 My assets exceed my liabilities but I still want my house paid off. You can be debt-free but live in a apartment that's not going to come with a peace of mind, because you have rent every month. When you own a home that's a different story.
@@autohelix In March I sold my house. I purchased another house and have a payment. The proceeds of the home I sold exceed the balance of my current loan by a little bit. I can either pay off the balance, and have no debt, while leaving me with little cash, or invest the $230,000 and still have my payment. Since I can pay off my debt, I am not worried at all what may happen. That is what I mean. Knowing that I can handle almost anything without borrowing, is better for me. How long will it take me to amass the 230K once it is out of my accounts? My interest is 4.15% on my loan. If I can earn an average of 4.16%, I am ahead.
Now what happens if an event occurs that I need a sizeable amount to cover. I have it, on hand, right now. I have never once lost out on a deal because I had cash instantly available, but I have lost out because I didn't. I don't need to apply for an equity loan, and perhaps pay a much higher interest than what I paid off, negating any and all advantage I may have gained, and costing me more. Do you think interest loans will stay this low? I don't.
But sure, I could invest in risky stuff and lose it all. I wont go risky, there are plenty of safe investments that pay well over 5%. I'm just saying that cash in the bank, so to speak is mighty comforting, and gives you a tremendous edge when negotiating. Lots of ways to go about it and to look at it. Peace!
I love how you guys handle money. I rock with y'all...trying to be a "Old Money Millionaire" LMBO
You forgot to mention the " WHAT IF " factor. Say if you lose your job due to economy down turn or some serious health issue. Also you are paying extra interest on that mortgage for 20 more years. Hey , each to his/her own.
He did mention the what if. The boring investor had 61k in investments over and above the remaining balance on the mortgage after 10 years. Also, in the case of job loss, is it easier to pay an $1146 mortgage or a $2400 one until you get back on your feet?
Yes that's the point of investing. You can just liquidate the money instead of having all the money in the house that's not liquid. You can't pay other bills with the house. Unless you have a super high interest or very long mortgage, investing is usually always better. That said you can always pay off the house a little early so you can invest a little bit
This is great! I wonder how it would be different if you gave them both a bunch of consumer debt. I also wonder at what point it is better just to pay on the consumer debt and at what point it makes sense to pay on consumer debt AND invest. Is there a timeline? For example: if a person can throw enough money at their consumer debt to be debt free within 5 years does it make more sense to do that then invest later. If they can't possibly pay it off for 10 years would it make more sense to invest at the same time? Where is the line? I don't know if there is a video in your collection that addresses this; but if there is please point me to it. If not, can you do one? Thanks. Love your channel. New viewer here.
You made it to 30k! Congrats!
Thanks, Selena! Great way to start off our Monday.
If you add the value of the house to the net worth, the difference isn't that much more. You also have to discount the investment returns by the amount of interest paid on the mortgage. When you adjust for the value of the house and interest paid, the risk adjusted returns are about even.
All of that is accounted for (even interest paid). What is hard to overcome is your money earning >6% versus
It is so simple. If you can earn more by investing than you can save by paying off debt, then you invest. If not, you pay off debt.
If I told you could borrow $10,000 at 4%, and invest that 10k and make 5%, your only question should be "can I borrow $1,000,000"?
Wrong. I'd ask for 10 million 😁
@@lionelhuts875 Why not $100,000,000 or a billion? You get the point.
Great analysis as always fellas- gives folks responsible with money better options for long term wealth building. I like how you guys always hammer the importance of early savings and the amazing compounding effect
Thanks Justin
The interest rate is over 4% because of other borrowing costs like Origination fee (about 0.5% of loan amount)
plus Mortgage broker fee (0.50% to 2.75%) etc. Getting 6 to 8 Percent tax free by paying off mortgage is better than Losing 35% percent in one month in the stock market
Brian and Bo,
I am a CFP professional and have been asked to give a presentation to a group of realtors in NC in regards to this topic. I would love to use this example. If credit is given on the slides, could I have permission to utilize this example during my presentation?
Should this apply for a low interest car loan? Especially if you have more than enough money invested / saving / coming in every month to pay off the loan? About to sign for a 30K auto loan at 1.99% interest.
Here in Brazil mortgage rates are so high (~10%) that IMO it doesn't even make sense to borrow the money in the first place - stock market average return above inflation is about the same 10% (past 26yrs)... - even tho I have enough money to pay in cash for the apartment I live in, I still prefer to rent, and invest the money elsewhere...
Will likely only buy a house if it represents
Miller,
Completely understand. Strategy requires a premium to be earned on investments over debt repayment. If your interest rate is 10%... not worth it.
Can you do credit card debt vs investing in a stock ? $10k each and 10% cc interest vs 10% annual rate of return
Only thing you don't include is the amount of interest paid over time so not really apple to apple comparison.
@moneyguyshow
My husband and I are in our mid 40’s we have about 195k left on our mortgage with a 3.1% rate. We pay $1900 a month on our mortgage would it be wise to start investing or make double payments to pay off the mortgage at this stage in the game? Thanks in advance love your show
Whenever anybody brings up this topic, I always point to Warren Buffett. He bought a house IN CASH at age 28. This was at a time in his life when his investments were earning about 50% per year! Mortgage rates would of course have been far lower than 50% so he could’ve just taken out a mortgage and invested the difference. Do you think Warren Buffett just didn’t understand compound interest or hadn’t considered the possibility of doing what this video is recommending??? Basically, he says leverage might increase your returns but you’re not going to sleep as well at night.
So he invested in the market and earned enough to buy a home out right. Which if you follow brian's plan of prioritizing investing when you're young, you'd have enough to write a check for the mortgage balance at 10 years in. You're agreeing with the boring investor here
Great video!! Credit Debt grows @20%, while Investment Account grows @10% per year.. So, Debt crusader thinks he/she wins.. . but..they do not take in account compound iterest.. Hence, the Investors wins b/c money multiplies x2 every 7-10 years conservatively..Thanks
20% credit card interest out paces your investments that is why paying your high interest debt comes before investing for retirement. (The exception to this is contributing a minimum amount to receive your full match opportunity)
The issue of taxation can't be left out of this discussion.
Nor can how much extra interest the investor has paid.
What are you getting at? Both people will be paying taxes first on there pay and again on their investments. Plus if these funds are invested in Roth options there are no considerations on the resulting portfolio balances. Am I just not understanding the point of your comment?
In your example. Is it a retirement investment or non-retirement
Hmm interesting. However, this is also assuming that the debt crusader is not participating in any sort of employer match into a 401k or something? this sounds like straight up mutual fund/index/stock market investments?
In a real world situation, the debt crusader would have been putting enough towards his 401k to get a company match (free money, although this is against what Mr Ramsey says to do). A typical scenario of that is a 5% investment for a 4% match. So 9% of his salary could have been going into retirement from the beginning, which means from age 30 to 40 @7% that's $100k balance after 10 years and not $0.
And then also with the house, the boring investor is also paying an additional $170kish in interest (240k @ 4% for 30 years) , so that brings the spread even closer. At the end, if we're assuming that the house appreciates at 4% over 30 years, a $240k purchase p rice house would sell for around $779,000. The boring investor would have paid 240 + 170 = $410k for the house, so he makes $369k on his investment. The debt crusader pays off at 10 years, paying $51k in interest. So he paid 240 + 51 = 291k for the home. 779-291 is $488k, so he made an additional $119,000 on his investment over the steady investor.
Then if we wanted to go a step further, that $119,000 extra cash could be living expenses for 2 full years, allowing the debt crusader to let his 401k appreciate even further (1.95million * 7% for 2 years) brings the totalup to 2,232,555, while the steady investor removes $60k per year for living expenses . If we took this a step further and said the debt crusader was actually doing what i said and putting the 5% with 4% match into his 401k, everything else the same, he would be 65 with 2.3 million in the 401k, and then 67 (to account for the 2 additional years of not withdrawing) with 2.65million. The SAVER at 67 would have 2.7million. So while these numbers can be convincing to some, realistically it's a wash at the end.
Overall moral should be to just pick a path and then dont stray from it...in the end you end up very close to one another and then at that point you pick a withdrawal rate for the lifestyle that you want.
The point is they both made the same investments at same growth. They both spent the same each month but one made minimum payments on his mortgage and used the extra on his investments.
Yeah, you missed the point. They use the same amount of money monthly, and we the results. Doesn't matter how much more interest you paid if you make that much more on the other end.
Every article and video written about this subject always neglects the practical value of a house. Sure, this makes sense in a sterile environment on a spresdsheet, but the real world doesnt care about your forecastes or formulas. The stock market may turn bearish and your magical 9% 8% and 7% growth they quote here never happen. Meanwhile paying off debt is the only gauranteed return on your money, other than company match.
The best way to do this is to do both. Time in the market with your 401k contribution up to the company match, then everything else over you efund goes to paying off your mortgage. You take advantage of the only two gaurantees for return.
That interest difference is factored into the example it doesn’t close the gap after the fact.
I have a good topic idea, I'm going to be a college freshmen this fall and I have 10k invested. Should I take out a loan to pay for the first year or should I take it out of my investment portfolio?
We're adding this one the hopper for future shows! Thanks for your question and thanks for watching!
bs.. your investment ROI is not a sure thing. your mortgage rate is.
if all this was true then everyone should cash out refi and put that money into the market, never paying off the house :)
If the US economy slows to a point where the markets fail to return more than 4% annually for a significant number of years, we have more things to worry about than saving 4% on a mortgage. It probably means collapse of society, in which case money is worthless anyway.
One question: what is “healthy” rate of return on one’s 401K plan?? I assume that’s what is meant by “investments”. 🤔🤔🤔🤔🤔
The glaring piece missing is the assumption that there's no mathematical benefit of having 20 years of no payments. This Free'd up cashflow can certainly be a benefit and lead to higher returns if allocated properly.
What if you do both? I started investing at 21 and took a break. I have 9k left of graduate student loans (should have them paid off by this Nov.) I am 28 and we plan on getting a house by Christmas or early next year. Can we do a happy medium? Pay off a home loan in 15 years and still invest? She wants a 30 year, but I want a 15 year so we pay more on it verse the interest?
absolutely.. you can literally look at the house like a guaranteed investment return on whatever your mortgage rate is.. so that portion is lower return but guaranteed ... the 15 will have a lower interest rate too which makes the math even a bit better... on average it's not the mathematically right move but it's safer and imo a good move if you are a little more risk averse or don't trust the stock market valuation right now ... I see this was a few months ago so hope you're happy with your choice.. would love to hear what you did... good luck!
I have friends in their late twenties debt crusading who pay the minimum into their pensions, and I’m like “NOOOOOOOO”
They forgot to put the equity of the Debt Crusader on the house after he paid it off in 10 years. He is not worth 0% in investment, his house is his investment too. Probably worth 300k-400k in real estate net worth.
Both have the same house
They just forgot to add it in after the 10 years but end game its the same amount
If only we lived in a perfect world where you are never unemployed
So would you rather have a pile of money that's accessible, or a low 50k mortgage that you still owe payments on? You're actually taking on more risk by assuming that you'll never be unemployed while paying off the house.
Gap gets closer if you factor in the extra $100k+ in interest the Boring Investor pays on his mortgage. Also, 7-9% real growth rate year after year is probably unlikely, there will be fees, down years during recessions, etc...Don't get me wrong, no matter how you spin it the math almost always favors investing over paying off low interest debt, but there is def some peace of mind that goes along with living a debt free life style.
The interest paid is built into the calculation. 7-9% over the long-term is pretty reasonable. Love being debt-free, but there is a time and place for when that should be a priority.
Having more than you owe in your accounts gives you peace of mind also.
Is it reasonable to ask if behaviorally the (even above average) financial mutant would actually invest the difference into the market for 30 years straight? I’m assuming 90% would take the lower mortgage and increase lifestyle somehow someway in a real life case study. They wouldn’t invest the difference as nicely as this was all laid out. I think the debt crusader would behaviorally invest at higher rates, maybe even higher, because all their income is available. Your response is so appreciated!
Have you looked at a lax factor that comes when investing vs paying off debt. Because the debt is a concrete number it's easier to stop the lifestyle inflation if you have a concrete benchmark where you can see your impact. So if you run the senarios where the saver only saves at 90, 80, or 70% of the rate (thus accounting for human tendanices) would they still come out on top?
There is no reduction if you set your investments on auto-pilot. I practice this with our “forced scarcity” concept. As I make more I increase all auto-pilot plans (including paying off mortgage debt early).
@@MoneyGuyShow I'm not saying you can't do it. I'm saying most people that take that approach don't. If you are self disciplined enough to do it correctly investing while having low interest debt is great. But if you don't have that level of control focusing on something with visible benchmarks will likely be better! (Also thanks for replying, I love the show. Just playing devil's advocate)
That concrete benchmark also means that you will not do better than that in terms of money saved/made. Your investments could go through the roof, so to speak. Of course they could end up worthless too, but so could your house in the wrong economic climate.
Is there a Nobel prize in finance? If yes these guys should get one!
Oh shucks (as we kick dirt uncomfortably) ☺️
Based on your name... can Tom Hanks play me in the movie about our journey 😉?
Well, it's not 'finance'. It's the Nobel Memorial Prize in Economic Sciences.
Thanks for the thumbs up for my comment, everyone! Just trying to do my part!
risk carries a price. the debt crusader got rid of risk and guaranteed a 4% return by paying off mort. would much rather be him.
Don’t disagree as a guy entering my late 40s. However, for and 20 and 30 year olds they should be focusing on building foundational investment assets. Get to be our age and you get the best of both worlds... foundation of growing investments and the opportunity to now attack and pay down debt early 👍
Yeah but you didnt add the value of the house to the debt crusaders assets?
Why would you? To access that equity, you're either taking on debt or selling the house. A screenshot of your home's Zillow page won't buy you anything.
Love your podcast as another reliable source that digs deeper into finances than Dave Ramsey. You mentioned in a previous podcast that the average millionaire pays off their house in 10'ish years. How do you weigh your indisputable math versus the financial flexibility to earn more with no debt in your life?
I was the debt crusader but I may switch
Now do this with credit card debt at 15/20% interest rate.
Very thought provoking video. It seems the best solution for me at age 22 making good money is to pay extra each month on my truck until I get my loan balance low enough to refinance from 12% APR to something lower and then I can focus more on investing... To me it seems until my investment returns beat my debt APR I better focus on paying that loan down
When we looked at our 10 year mortgage vs a 30, we would have given an extra $100,000+ in fees to the 30 year mortgage vs the 10.
How come this wasn’t explained in this video and how saving that extra $100000+ in bank fees would have contributed to a much larger investment portfolio for the guy that paid off in 10?
What bank fees? Do you mean interest? If so, that is actually explained in the video fairly clearly.
Gents - what about factoring in debt crusader throwing the mortgage dollars after 10 years all towards investment? Good video, but you’re assuming the investment amount between the two remains equal. If debt crusader finishes paying off the house in 10 years and throws all the money in investments he has 20+ years of wealth-building. Thanks
Cindy,
That is exactly what we did. Go review the numbers and it shows how powerful investing while young can be to your long-term financial success.
What if you can do both?. Pay off your house in 10 years but also max out your Roth IRA or 401K? That is my goal
Do you also max out your traditional IRA?
@@ChrisInvests all I have is a Roth IRA because I do 1099 jobs.
Tall Queen individuals can have a traditional and Roth IRA
@@ChrisInvests do I need all that though LOL? I'm sure I would have at least 2 million by retirement. I honestly probably would never even use that because I live so cheaply
@@ChrisInvests True, you can have both, but you're still limited to $6000 total (under 50). Why split that up? $6k just in the Roth would be better.
Just wondering...what happened to the equity in the home for the crusader guy? His total investment balance would be the appreciation of the home right? So 9% according to you. He clearly would'nt start off at a zero investment balance. The Boring guy would have that partial appreciation of his house added to his investment as well. Just a little confused on the math at the first 10yrs. 10yrs is a long time without investing based only on mortgage debt! lol
Both have the same house. So....
Do you still believe this to be true when paying off a rental property? 34 yes old, one duplex that is cash flowing. Owe 300k on a 600k home. We're thinking that if we excelerate the pay down we can use that huge monthly cash flow as a great tool in retirement or snowball into another rental. Thoughts?
The maths they present here holds true for your described scenario.
Invest the money in shares, pay minimum on the rental until you get to around 50, where the interest rate compound effect is about even, then leave your shares alone (don’t sell!!!) redirect all cashflow to paying off the rental.
You never considered the risk factor. Life isn’t a smooth sail. You can guarantee that Murphy’s law will appear.
I think it was covered well if you listen to the entire podcast instead of a small portion
What about the risk factor of having all your money tied to a single asset (your house) that is really hard to sell during a recession?
The person with a diversified portfolio is likely to be safer during a financial/housing bubble. Putting 100% of your money into a single asset is a bad idea, even if it's the house you live in.
Miller Medeiros you won’t be putting all of your 💰 into the house if your investing 10-20% into the stock market, other real estate or business endeavors while paying down that mortgage. Once the mortgage is paid off, you can increase the investing.
@@kelvinreyes64 this video was comparing someone that puts 100% of the cash into paying the mortgage as fast as possible vs. someone that invests half of it... I'm against using 100% to pay the mortgage, but would be in favor of someone doing 75-85% towards the mortgage instead of just 50%... (So they can invest 15-25% towards retirement and increase diversification).
It really doesn't matter the portion you choose for paying off mortgage and investing. The better method is always be debt free before any investing. This way you won't lose your house during the economy downturn. Remember it is the truth that all foreclosed houses are because their mortgage payment not getting paid in time.
I love setting goals. And seeing the mortgage balance go down gives us something to shoot for. Saving for retirement is kinda boring cause there is no goal amount. Of course it's great to do both.
Why don't you apply the same philosophy to car loans, where the interest rates can be pretty close to zero? Curious because I'm in the market to get another car towards the end of the year.
The idea on the car is likely to make sure you don't buy a car you "can't afford". Maintenance is expensive; insurance; depreciation; cost of opportunity. Etc... New cars go down in value ~10-20% per year. If the car value represents a big part of your annual income (eg. above 50%), it will corrode your net worth.
Uh uh.....the clash of philosophies. Money guy vs. Dave Ramsey
We're doing a whole show covering the Money Guy take on Dave's 7 Baby Steps in tomorrow's livestream! Lots to talk through.
@@MoneyGuyShow Nice. Looking forward to it.
The guy who paid his home off in 30 years at 4 % interest at a 300,000 dollar loan with 20% down : paid 150,000 dollars in interest.
The guy who paid his home off in 10 years at 4% interest at a 300,000 dollar loan with 20% down : paid 30,500 dollars in interest.
So we are just going to act like the 120,000 dollars in savings, doesn’t factor in to the 10 year guy’s investment potential, which is now increased because of extra cash flow after 10 years and the savings of 120,000 dollars over the life of his loan?
Not to mention the guy who paid his home off in 30 years, would need to sell his home for 150,000 dollars over his purchase price before he got neutral on the transaction.
The real error here, don’t be in a house you can’t pay off in 10 years and still invest at least 8 percent of your income during the 10 year pay off period.
🤷♂️
And why didn't you factor in that the guy that invested over those 30 years likely got a 7% return on his investment just matching the market? It really is simple math. Pay off your home early to save 4% per dollar or invest it instead and receive 7% per dollar.
The only thing I will concede is that the risk is higher in investing. You know for sure you are saving 4% paying off your mortgage early while there's always a risk future market returns don't return 7%.
Arie Fraiser, the point I was making was that this example doesn’t demonstrate the increased investment potential the debt free guy has.
1. He has more cash flow, to invest minus 10 years he theoretically lost by paying his house off.
2. If both are assuming 35 year investment life’s at the beginning, the debt free guy still has 25 years of investment.
3. The difference is, his 25 years are with much bigger guns, and much less risk. He doesn’t have the risk of debt and he has more money to invest with over the 25 years. Not to mention an extra 120,000 thousand he saved on interest, that’s outside of his already increased cash flow because of not having a mortgage for 25 years.
4. Debt free guy has home investment recoup ability. His home value has to increase 30,000 dollars instead 150,000 thousand to recoup investment.
5. The early investor isn’t getting the advantage of 7 percent over 30 years, he’s getting the advantage of 7 percent over 10 years, and more importantly he has less cash flow to invest over 30 years because of the debt.
6. The early investor has the increased compound interest potential given his early 10 year investment, but at increased risk because he has debt for 30 years, but I would argue the increased investment potential of the debt free guy, given home interest savings and increased cash flow, gives him the catch up potential easily.
@UCmhUvomRHJl7Samo9gSH_tQ And I'm saying there isn't any increased investment potential. The math clearly shows that. That money that could have been compounding for 30 years is stuck in his house not compounding. That's why the gentleman that invested from day one has a bigger account balance after 30 years. He had a 10 year investment head start and the difference will only get more pronounced over time as the chart shows. And the more money you believe the gentleman who paid off his house earlier isn't more money it's just reallocation of money. Also that dollar the investor invested 10 years earlier will always be worth more than the dollar the saver invests 10 years into the future due to inflation and compounding.
The math really proves out everything I've said. If you have any calculation that says otherwise I would be happy to look at it.
Arie Fraiser, but what about the 120,000 dollars. That’s not calculated as reinvestment here (that’s the increased potential) that’s 120,000 thousand dollars before compound interest. That’s huge! Also the early investor isn’t counting the money he lost by being upside down in his home he can’t sell for 150,000 dollars over his paying price. Lol
The difference between the two as showed in the video was only 550,000 dollars. They didn’t even account for the 120,000 dollar increased investment potential the early pay off guy had, before compound interest for 25 years.
120,000 thousand dollars over 25 years at 7 percent = 652,000
And he can recoup his home investment. Unlike the guy who paid 150,000 over his purchased market value after the 30 years.
Difference more than made up.
And to top it off, the debt free guy, had significantly more cash flow for 25 years to account for the risks of every day life.
One thing people ALWAYS do, is exaggerate the inflation to make up the difference in their head. So they can have the nicer house and justify the 30 year pay off. Most people keep the 30 year note not to invest the difference, but to have the car that’s wanted to go along with the 300,000 dollar house. lol.
Early pay off guy wins!
Let's just add inflation to the mix too. The average now is 3%. So, the 30 year guy is actually paying principle and interest on a curve of inflation, as well.
I agree with you and @jeepcherokee24 above. All this seems to equal about the same in the end as long as you stay with a plan.
Brian's approach is targeted to those of us already with money iQ. The Ramsey approach is more for the masses. Neither is wrong, but I'd probably follow the guy with a few million to his name. No offence Brian, because your plan is totally plausible.
When you come tour the office/studio, and see my original Star Wars collection and Buck Rogers lunchbox... you may rethink that analysis on who has more 😉
Like you said, Ramsey's approach is for people without a clue, a plan, or any financial direction. It's a good plan for those that are lost. If you have an idea and can handle money, the question is "can I earn more by investing than I can save by paying off debt?". That is a pretty straight forward question and the math is simple. I will say that once you take the lump and pay off debt, there are no other options. Whereas is you invest the lump, you still options available at anytime you choose to exercise them.
Ramsey’s made a killing selling books, that doesn’t mean he’s right
Did you snowball the difference after Larry paid off his mortgage?
Yep - loaded up the investments after the debt was paid-off, accounted for the interest, and had the same cash flow in the analysis 👍
What kind of investments?? I'm in my 30s. 100k left on the mortgage!!
....so if this line of reasoning is valid, it implies I should get a 5% HELOC on a debt-free house and use the money to invest in the market and earn 8-10%. is that your recommendation?
Nope 👎
Prepaying your mortgage in your 20s and 30s is like investing in a high fee annuities. The damage has been done and it is expensive to unwind the error. With annuities it is because of surrender periods and fees. With mortgages it is because of closing costs and variable rates on HELOCs.
Learn your lesson and don’t make the mistake going forward 😉
You bought the house to live in, not to borrow more on. This is a way to make more money and pay off the house
What if he lost his job and the market crashed? Investment account cut 50%. ?? You are not calculating risk. Debt free is better.
Dollars grow less the older you are. A dollar invested at 20 grows far more than that same dollar invested at age 50. If you are 45 plus pay off that mortgage!! Dont retire with a mortgage!!
I’m trying to find where Dave says to not invest until you pay off your mortgage. Oh yeah, he doesn’t. Let’s try an example where a guy is paying a 15 year mortgage that’s less than 25% of his net income while funding 15% of his gross income towards retirement. These happen simultaneously.
So, if you make 120k a year, that is about 90k net without state tax. Mortgage payment could be up to $1875 per month and Investment per month would be $1500. Your disingenuous scenario does not accurately reflect Dave’s advice. You may sucker some people into debt, but not me.
We completely agree that Dave’s Baby Step 4 would have you invest 15% towards retirement before mortgage debt prepayment (Step #6). We even covered this in our full episode.
We did a show that will be released this Friday that actually covers our take on Dave’s Baby Steps. If you are in your 20s when you start investing/saving 15% could be enough according to Fidelity research. Everyone else should strive to be investing 20-25% towards retirement.
BTW even in the scenario you laid out... the Boring Investor still would have more at retirement. The premium for investing (spread between what is made over what is paid in interest) is hard for the Crusader to overcome. However, there will come a time in the investor’s life (usually in their late 40s to early 50s) that they will still want to retire the debt early for peace of mind purposes. Focus on building foundational investments in your 20s and 30s (the compounding growth is too valuable). There will be plenty of time to pay-off low interest mortgage debt in your late 40s and 50s.
Thanks for the comment.
You guys are overlooking one aspect of paying off the mortgage early, which is that amount of money which was the monthly payment, can now be used to invest. Remember one thing, mortgage is debt only with a fancy name.
Nope that is built into our analysis too. This was a completely apples to apples analysis - go watch it again 👍
Leisure suit larry...boring? lol. Check out the videogame.
What about the interest paid in the mortgage over 30 years? that's lost money? This was interesting using 30yo's as an example, do your opinions change for 45+ year olds?
Doesn't matter how much interest you have to pay, since you make that much more on the investments.
I have mentioned previously, if you have foundational investment assets and are saving 20-25% for the future- sure prepay the mortgage debt in your late 40s. Chris Hogan and Dave share that millionaires pay-off their mortgages within 10.2 years. I resemble this strategy since I will have my house paid off in the next 5-7 years (early 50s). This is my third house and I spent my 20s and 30s loading up the investments since their growth potential was so powerful in those younger years (compounding growth).
@@MoneyGuyShow Thank you for your response. I should state I am in Australia (not the US) and housing prices here are astronomical. $1 million here buys a fairly middle class single story house. We have $670k left to pay off our mortgage (3.65% interest) and hitting it hard can pay this off in 2.5 years. But it would mean stopping all payments into investments and retirement savings during this period and this is what I am confused about. Husband and I are late 40's and want the peace of mind of no mortgage but at the same time have concerns about not continuing to contribute to retirement. Ideally it would be good to do both as you have suggested but that would mean taking longer to get rid of that mortgage.
As long as you didnt invest in TSLA or ALGN. Lol of course you should be in mutual funds.
This comment didn't age well.
So how do you apply this to college graduates with depth like mortgages?? Does Dave Ramsey’s baby steps work if your stuck in baby step 2 for years?
They have addressed this in other videos, because of potential compounding interest based upon age. If your loan is less than 6% in your 20's, 5% in your 30's, and 4% in your 40's, then investing before paying them off may be financially in your best interest. However, there is a trade-off between being fully optimised and managing your risk. So the guidelines are there, but you make your own decisions with that information.
So this goes to show that Dave Ramsey's method is good but not the best idea
Not necessarily. Dave Ramsey would say to put 15% of your income on other investments that aren't your house before aggressively paying the mortgage. - pay off your home early is step number 6... Investing 15% for retirement is step number 4...
Not sure Dave would disagree with me. Review his Baby Steps and pay attention to steps #4 & #6.
Their assumed rates of return are their first mistake. Others have mentioned the fact that these two frat boys are rubbish at risk analysis. They are bogus salesmen that an experienced person --not an inexperienced person-- will smell at 50 feet.
Not feeling like Al is a fan 😏
Blessed your heart and thank you for the comment. Refund check is in the mail for what you paid 😎😂
I know you two will choke and shake your heads, I'm debt free have been since 2009 I do not invest in counter party risk items, here's a kicker I have twice my body weight in pounds of physical silver I'm all in on dollar cost averaging under $10.00 an ounce. A few shows back you two talked about gaining 7% on your investments everything I found that paid that well or better had a lot of risk involved my idea of of making some money is when I buy a 20 K vehicle for $2,500, $25 K boat for $5,000 or a $50/60 K aircraft for $10,000 from the owners that are in over their head in debt and have become desperate there is always someone that will get in over their head in debt I always keep cash on the ready. It's not how much you make it's how you spend it, i'm also a blue collar worker and a tenth grade dropout
I knew Dave Ramsey was wrong
Dave ramsey wouldn’t like this advice
Not sure I agree. Baby step 4 has you invest... Baby step 6 is pay-down mortgage. We only vary on how much to invest in step 4 👍
@@MoneyGuyShow In this episode someone who had a higher return from investing than his debt interest asked this question. Not implying anybody is wrong, but this is why I said he might defer on this watch?v=_Dfqa8efCIo
When the next recession hits, which will likely be soon, I'd rather not be invested in the market
When that recession hits I’ll just be buying into the stock market even more! FZROX will be greatly discounted!
That mindset is going to cost you so much money lol good luck timing the market
@Craig Carson I'm just here from the future after the great COVID rebound to show how right Mr. Carson was.
I what world are you getting 9% interest?
S&P 500, to begin with.
That’s assuming you can even make 9-10% a year every year. Sometimes the market underperforms or even returns negative ROI. See how your logic is flawed? Your reasoning only makes sense in a world where the stock market is perfect and never has a correction.
Sorry to burst your bubble, but their logic is not flawed. The boring old S&P 500 has an AVERAGE annual return of 8% since adopting 500 companies back in the 1950's. That includes all the corrections and downturns. Look up CAGR.
DR NEVER has recommended not investing until the mortgage is paid. He recommends not investing until ALL consumer debt (sans mortgage) is paid. Then he recommends 15%.
Personally, I'd do just the match while in consumer debt (sans mortgage) and then increase after.
Trippin you get it. Don’t think we vary from Dave as much as some of the comments would have you believe.
@@MoneyGuyShow thanks for responding. The financial order of operations does vary from the Baby Steps. However, what I like about both is that a clear roadmap is given. I like the baby steps emphasis on debt elimination but I like the financial order of operations emphasis on wealth building and taking advantage of the match. Idk about putting debt elimination (low interest, non credit card) so far down the order, but I definitely believe in taking advantage of the match prior to debt elimination. I also understand and like the car advice while in the early stages.
These guys are not factoring risk into these two scenarios. Eg. Job loss, health problems etc. One is always better off by having no debts.
Not really... You might lose your job during a recession, not be able to sell your house for a long time, and have 100% of your money tied to the house.. the 30yr mortgage might give you some flexibility to pay it off, and you will have more money on liquid assets/investments.
Not a good idea to put 100% of your capital into a single asset, even if it's your home.
Miller crushed it! Houses are illiquid - hard to get money out in dark economic downturns. Investing into a diversified portfolio will allow you more flexibility and options since you will access to a pool assets to pull you through.
We are completely ignoring future interest rates. What happens when you need to pull out some of that money you have tied up into your house? Are interest rates going to be the same or lower? Or since they are at historical lows, do you think they will be higher? I am going to go with higher...which means if you do have an event that necessitates a home equity loan, you will get hit with that raised interest rate, negating any advantage you may have accrued, and actually costing you way more money.
@@MillerMedeirosTheir skewed assumption is that the dude that payed off his house is not also investing which is very unrealistic. Wise investors are privy to the concept of asset diversification, which is where the logic of only owning your home as your only asset is debunked. If you dont have debt, you will be able to do more investing.
It's interesting how people want to always justify debt. Debt is "money owed" which needs to be payed back with interest. There are tonnes of studies about regular middle class millionaires that support this logic.
exactly my thought. i was always taught to owe nobody. job , and health aren't certain.
Assume 9% average ppl make 4% or less, how does someone make 9%
My savings account gets 3.5% you are doing it wrong
: )
U should add divident into this calculation
dude on the left talks too much