Hi there,

My husband and I have embraced budgeting and being mindful of our expenses. He’s on board with me but I am the one who drives the bus.

 

We have a small mortgage that was previously an LOC that we refinanced into a 4 year term at 1.85%. The idea was to focus payments and get it paid in a finite amount of time. It’s working well and I’m able to budget a surplus in our monthly income that I’m now using to cashflow property improvements that have to be done. We had no idea that we could cash flow these projects so are quite excited.  My plan is also to cash flow, as best we can, the 10% prepayment that we are allowed to do each year on this mortgage. I did it for 2020 with a vacation payout we received (company changed their policy and cashed out our accruals).  It knocked 6 months off the term (mortgage principal was $45,000 in November when it was taken out).

 

We have an investment broker who has been quite helpful but he thinks I’m crazy to go that route with such a cheap interest rate on borrowing.  He thinks we should invest.  He figures that we could get a return of upwards of 10% and that the cost of borrowing was insignificant.

 

We have other debt in the form of a mortgage on our principal residence and a rental property that takes care of itself.

 

My husband understands my drive to pay off the debt.  We are 49 and 47 respectively and my fear is retirement is looming. We both work for the Town we live in and have a defined pension plan.

 

Knowing that our guy is a broker concerns me only from the perspective of where his ultimate interests would lie. I listened to your podcast on this topic recently for a person that had the money and would not miss it should they choose to pay down the debt.

 

Alberta, Canada

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L, first off, I’m proud of you. I can feel your passion, humility and drive coming through in your e-mail and I love it. I also love that you’ve embraced the family CFO role and I hope there is no bitterness about this at all as some folks just have a knack for these things while others are better at the supporting role. If you can work together anything is possible.

 

Yes, I believe you are missing something and so is your broker. What you’re missing is the return on peace of mind and the ability to avoid irrational and emotional decisions when all hell breaks loose. I’m actually a little frustrated that your broker ‘thinks you’re crazy.’ Maybe consider a deeper discussion with this adviser to learn more about this view. If you aren’t able to find common ground it may be time to seek another opinion.

 

But what does the math say? With interest rates at historic lows and longer-term market returns nearing double digits, it’s hard to argue against keeping low interest debt and opting to invest. While I love it when folks cite these facts to me like I don’t know that, let me tell you a story that happened just a year ago.

It was late March 2020, and the world seemed to be ending. Covid was in full force and the markets were falling daily. At the depth of the decline the S&P had shed over 35%. Now, I realize that many younger, newer investors took to their RobinHood app and made stock purchases. That may have been a very smart move; however, very few of those new investors had the pleasure of watching their investments decline considerably against the backdrop of debt since they were new and starting with relatively small amounts. I on the other hand, not only saw my personal investments decline but was managing hundreds of millions of dollars for clients and watched daily as these values continued to erode. Just about every day I had long talks with clients discussing their overall plan and, while this was not the first time, I found a very common theme among my investors. Those with no debt had very little worries, while those with debt were very concerned about their portfolios and were asking if it was better to just sell everything and pay off their house. Thankfully very few did this but the theme regarding debt vs. no debt and the desire to either stay the course or sell was as correlated as I had ever seen it.

 

Additionally, out of the over 700 or so clients we represent there was a total of 4 people who added money within days of the actual bottom of the market. Think about that for a moment, when the market was being decimated less than 1% of our entire client base bucked the trend and bought stocks. Guess what, two of those people were myself and my client relations manager Linda. Do you know also what the theme was among the 4 of us that bought? You guessed it. Little to no debt.

 

So let’s see. What’s the value of having peace of mind when the markets are eroding daily and you have no mortgage? Is it worth 3%, 4% or 10%? What’s the value of having no debt, peace of mind and being able to add money when stocks are down? Well, considering the market is up almost 100% from the depths of the decline, I’d say it’s pretty high.

Not to talk our own book but your saga is exactly why we’re rolling out a Wealth Development program for folks just like you who are on the fiscal DIY Money path and maybe only on occasion need to talk to a Daniel, aka our Certified Fiancial Planning Professional, and make sure your ducks are in a row. We’re putting the finishing touches on this program now and I’m excited for what it entails. I think this may be something you’d be interested in.

In the meantime from the little I know about you from your e-mail it sure sounds like you’re on the right track with established goals and priorities. There will be many distractions along the way however what I have learned is those who remain focused and diligent have a much better success rate than those who do not.