Pay off your mortgage early? That’s the biggest disadvantage, says self-made millionaire
In 2003 I did Bought a 1,000-square-foot two-bedroom, two-bathroom apartment in San Francisco for $ 580,000 with a 30 year fixed rate mortgage of 4.25%. By the age of 26, I had almost all of my savings invested in the 20% down payment.
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For the next several years, I became obsessed with paying off my mortgage early.
In 2015 my wife and I finally made it. It was so satisfying to eliminate one of our biggest recurring expenses. With one less burden we could live life more freely.
But just a year later that feeling disappeared – along with the fire to improve my finances.
There are several studies citing this psychological benefits Early debt settlement, such as emotional relief and the strength to avoid recurrence.
All of this is true. But the biggest downside that nobody talks about is the total loss of motivation to take calculated risks and work on them as hard as possible increase your wealth.
After I was mortgage free, my wife and I lived comfortably on that Severance payments that we negotiated when we quit our six-figure jobs in finance (at which point we had a net worth of $ 3 million) and the $ 150,000 in annual passive income – mainly from real estate, dividend stocks and bonds.
But my whole attitude slowly changed when I sent the last mortgage check. I’ve stopped aggressively looking for new freelance consulting jobs. I only accepted one out of three contracts a month. Instead of working 60 hours, I only worked 20 hours. At about $ 10,000 per contract, I lost $ 20,000 in monthly income.
To reward us for paying off the mortgage, my wife and I also went on a month-long trip to Asia. We visited friends overseas and saw the ruins of Angkor in Cambodia and then spent weeks camping in Yosemite. Then we flew to New York for two weeks to see the US Open. We spent over $ 10,000 on the entire trip.
It was a lot of free time – so much that I was $ 50,000 behind on my goal of achieving $ 200,000 annual passive income. The plan was to increase our money so that we could feel financially secure until a baby was born.
I’ve spoken to several people, including readers of my personal finance blog, Financial samuraiwho had similar experiences after paying off large debts early.
“I have definitely noticed that the closer I get to financial freedom, the less motivation I have for my job,” one person told me. “It’s almost like we need this monkey on our back to propel us forward.”
And then there are some who feel the opposite.
A Financial Samurai reader commented, “I just paid off my house after eight years and four months. Now I am extremely motivated to invest so much [money] as possible in other investments such as the stock market, my own business and rental property. I’m 35 and self-employed, so I don’t have a pension or 401 (k) company to rely on. “
Of course everyone is different. For me, a mortgage fueled my hunger. Without them, our monthly cash flow increased by $ 2,500 per month, and we viewed it as extra pocket money.
The most important lesson I learned from prepaying my mortgage is that you should always have something to keep you motivated and financially motivated. When you’ve got your living expenses covered and things are simple, it is tempting to go soft and ignore your finances.
Only the “gung-ho” folks will bother to take risks or invest extra hours to get that raise. When you have no financial burden and no one is dependent on you, there is no point in working twice as hard.
If you focus on paying off your mortgage, this is good for you. Getting rid of debt is generally always a good thing. Plus, you get a guaranteed, risk-free return without a mortgage.
Just think of the cons.
In addition to losing motivation, if you pay off your mortgage early, you will also tie up capital in an illiquid asset. Unless you have a very diversified net worthHaving a lot of capital in the form of home equity can be a bad thing. Your home could collapse in the next storm or burn down in a fire.
And with interest rates at all-time lows, it may make more sense to refinance your mortgage with a low fixed-rate term for as long as you want to own the property – and then invest the rest.
The correct answer will depend on your current situation, risk tolerance and long-term goals.
My best advice is to pay off your mortgage when you no longer want to work. Find out when to retire and divide your amount of debt by the number of years of work left.
To get a realistic picture of your financial future, there are free pension calculators. After all, there is no rewind button in life. It is always better to plan too much than to plan too little.
Sam Doge Worked in investment banking for 13 years before starting Financial samurai, a website for personal finance. He has been featured in Forbes, The Wall Street Journal, The Chicago Tribune, and The LATimes. Sign up for his free weekly newsletter Here.
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