8 ms·

The threshold where you have enough has been driven up by crazy rents and house prices. Personally, I want my house paid off before I'm 40, so I shoot for maxim

by hkt 5y ago

The threshold where you have enough has been driven up by crazy rents and house prices. Personally, I want my house paid off before I'm 40, so I shoot for maximum earnings and remote work that lets me live in a cheaper place. That ratio makes my ambition very attainable. Related is the sustainability of work: I don't want to need high earnings past 40. I want to retire into a second career I'll find more fulfilling but which might pay dramatically less. Higher pay now is the only way I can achieve this.

mattwad 5y ago
not a bad idea!
foobarian 5y ago
Why would you pay off your house when you can keep the cash in an investment account making > 5% APR vs. the house loan which presumably is in the low 3s.
- hkt 5y ago
  Risk. I'm just old enough to remember what the financial crisis did to people's pensions. I'm happier to take risks with the rest of my money if my home isn't exposed to them. During a crash I'd expect to lose on both earnings and investments. Losing my home as well would suck.
- jokethrowaway 5y ago
  I don't trust banks, the market and the governments manipulating them. You never know when they're going to pull the rug from the infinite growth market. Maybe Crypto will do that? Maybe a few more years of lockdown? Who knows? I agree that it's an unlikely scenario, but I'd rather be poorer and own my house than be dependant on a bank - even if that means compromising on its size or location.
- tome 5y ago
  Where are you getting 5% interest? Best I can find in the UK is about 2% on low balances.
- nicoburns 5y ago
  House prices are increasing by >5% a year in a lot of the world.
  - reedjosh 5y ago
    This doesn't change the equation. Go buy a house that will increase by >5%/year, but then don't pay it off any sooner than you have to. Make the minimum payments, and invest in something that will return a stable 5%+ with your remaining income. Just because the house itself increases in value, doesn't mean you should pay down the ~3% interest rate loan any faster than you have to. And really, once you've built enough via this strategy, you should either invest in a more expensive house or buy a house to rent afterward. This is all the consequence of inflation and easy money/loans, but the smart money move is to never pay off low interest rate loans. This is particularly true when inflation (acknowledged anyway) is 6%. Using the 6% number, you're actually gaining (on average) 3% on a 3% loan just by using the cash.
    - claudiulodro 5y ago
      I'm not sure exactly how it affects the calculations, but if the house is paid off, you can use the money that would have gone towards mortgage payments towards investments though. So instead of $1000/mo towards mortgage and $1000/mo towards investments, you could do $2000/mo towards investments. It's probably a smaller total return than your method, but it's way less leveraged.
      - liketochill 5y ago
        It’s always better to lever up if returns are greater than interest or inflation is higher than interest. And residential mortgages are the cheapest source of leverage available.
        reedjosh 5y ago
        Cheapest and most easily attainable.
      - 5y ago
- WestCoastJustin 5y ago
  Canadian home prices have risen 70% or by $300,000 since 2015. There was almost a 30% jump just last year. Source: https://www.straight.com/news/canadian-home-prices-have-risen-70-percent-or-by-300000-since-justin-trudeau-took-power-in-2015 https://www.straight.com/news/canadian-home-prices-have-rise...
- matheweis 5y ago
  What investment can reliably get > 5% APR with low risk?
  - xxpor 5y ago
    Not exactly what you're looking for, but in the US I series bonds are currently paying >7%. The biggest downside is you have to hold them for a year. The other issue is you're limited to buying $10k in a calendar year.
    - lotsofpulp 5y ago
      Currently paying. It is a variable interest rate, and it would behoove you to assume that if a treasury is paying 7%, then real inflation is much more. Hence the SP500 returning 30%.
      - xxpor 5y ago
        Sure, but if you're looking for the lowest risk thing that's paying at least CPI inflation. A lot better than cash under the mattress (or a savings account for that matter...)
  - sokoloff 5y ago
    Over the timespan comparable to a mortgage? Broad-based equity funds. The worst ever 20-year return for S&P 500 was +6.4% per year for the 240 month period ending in May 1979. https://www.thebalance.com/rolling-index-returns-4061795 https://www.thebalance.com/rolling-index-returns-4061795
    - tspike 5y ago
      *assuming conditions over the next 150 years mirror those during the sudden rise of a single global superpower with control over the world's reserve currency and a continent full of unexploited natural resources at its disposal
      - 5y ago
- Clubber 5y ago
  >keep the cash in an investment account making > 5% APR vs. the house loan which presumably is in the low 3s. One is guaranteed, one is not. Markets are volatile. I lived through 2001 and 2008 as a working stiff, that shit can drop on a dime. Right now, I have no debts. House and vehicle are paid off and I have an "oh shit" account that's pretty good. I can sit here as a hermit for at least a year or two, three if I really hunkered down and pinched pennies. It's a good feeling; one less thing to worry about. Now if I put all that money into the market and shit hit the fan, not only would I not be willing to sell stocks due to their price plummeting, I would still have a mortgage and car payment. I'd be in this situation for 6 months to a year. Not a great situation. Ensure your freedom / ability to live first, then invest heavily, IMO.
  - knappe 5y ago
    This is something you can hedge against, which is known as a sequence risk [0]. There are investment vehicles with built in volatility buffers designed to avoid this https://paradigmlife.net/blog/episode/the-volatility-buffer-how-to-reduce-the-risk-in-investing/ https://paradigmlife.net/blog/episode/the-volatility-buffer-.... That 3 years of cash on hand would be better off in some kind of investment and if you're worried, supported by a volatility buffer. [0] https://www.investopedia.com/terms/s/sequence-risk.asp https://www.investopedia.com/terms/s/sequence-risk.asp
    - foobarian 5y ago
      This illustrates why rich people are rich, and have an easier time getting richer. Even if they don't have time or aptitude to learn about this kind of thing, they have family or paid professionals to guide them.
- phkahler 5y ago
  >> Why would you pay off your house when you can keep the cash in an investment... I asked someone that in my mid 20's. He said "It's nice knowing I can support my family working at McDonalds if I have to." That stuck with me. Something fundamental changes in your life when you become debt-free.
  - sangnoir 5y ago
    > Something fundamental changes in your life when you become debt-free. Being able to pay off a debt at anytime is equally freeing, for me at least. Paying off a loan with an interest rate significantly below inflation is not a great use of money[1] (and an opportunity loss). Putting that lumpsum into bonds (any bond with interest higher than the loan) is better, or even investing in stocks with a stop-loss. If I lose my job and have to flip burgers, that's when I'll pay off the loan and get a little extra from the investment/bond, thanks to the power of compounding interest. 1. Its the equivalent of someone offering you a 6- or 7-figure loan payable in 20/30 years at 2-3% when inflation is 6%, and you decline.
    - r0s 5y ago
      The opportunity loss is what I don't get. Without the debt you can take on new debt that could be say a rental property or business loan. How is a bunch of money tied up in debt, and an equal amount invested to hedge that not a huge opportunity sink?
      - sangnoir 5y ago
        It's hard to argue in the abstract without figures and expected returns. If paying off the debt opens the door higher returns, then I'm all for it. All things being equal, I'll keep $250k cash with a $250k mortgage at 2.7% today, as opposed to a paid-off house and a $250k hole in my account.
      - jandrewrogers 5y ago
        There is no loss of opportunity. You can borrow against invested money at very low interest rates, lower than mortgage interest rates, and people often do. In today's crazy real estate market, when people make "all cash offers" that is often just cash borrowed against securities. It is some of the cheapest debt that exists.

by hkt 5y ago

mattwad 5y ago

not a bad idea!

foobarian 5y ago

Why would you pay off your house when you can keep the cash in an investment account making > 5% APR vs. the house loan which presumably is in the low 3s.

hkt 5y ago
Risk. I'm just old enough to remember what the financial crisis did to people's pensions. I'm happier to take risks with the rest of my money if my home isn't exposed to them. During a crash I'd expect to lose on both earnings and investments. Losing my home as well would suck.
jokethrowaway 5y ago
I don't trust banks, the market and the governments manipulating them. You never know when they're going to pull the rug from the infinite growth market. Maybe Crypto will do that? Maybe a few more years of lockdown? Who knows? I agree that it's an unlikely scenario, but I'd rather be poorer and own my house than be dependant on a bank - even if that means compromising on its size or location.
tome 5y ago
Where are you getting 5% interest? Best I can find in the UK is about 2% on low balances.
nicoburns 5y ago
House prices are increasing by >5% a year in a lot of the world.
- reedjosh 5y ago
  This doesn't change the equation. Go buy a house that will increase by >5%/year, but then don't pay it off any sooner than you have to. Make the minimum payments, and invest in something that will return a stable 5%+ with your remaining income. Just because the house itself increases in value, doesn't mean you should pay down the ~3% interest rate loan any faster than you have to. And really, once you've built enough via this strategy, you should either invest in a more expensive house or buy a house to rent afterward. This is all the consequence of inflation and easy money/loans, but the smart money move is to never pay off low interest rate loans. This is particularly true when inflation (acknowledged anyway) is 6%. Using the 6% number, you're actually gaining (on average) 3% on a 3% loan just by using the cash.
  - claudiulodro 5y ago
    I'm not sure exactly how it affects the calculations, but if the house is paid off, you can use the money that would have gone towards mortgage payments towards investments though. So instead of $1000/mo towards mortgage and $1000/mo towards investments, you could do $2000/mo towards investments. It's probably a smaller total return than your method, but it's way less leveraged.
    - liketochill 5y ago
      It’s always better to lever up if returns are greater than interest or inflation is higher than interest. And residential mortgages are the cheapest source of leverage available.
      - reedjosh 5y ago
        Cheapest and most easily attainable.
    - 5y ago
WestCoastJustin 5y ago
Canadian home prices have risen 70% or by $300,000 since 2015. There was almost a 30% jump just last year. Source: https://www.straight.com/news/canadian-home-prices-have-risen-70-percent-or-by-300000-since-justin-trudeau-took-power-in-2015 https://www.straight.com/news/canadian-home-prices-have-rise...
matheweis 5y ago
What investment can reliably get > 5% APR with low risk?
- xxpor 5y ago
  Not exactly what you're looking for, but in the US I series bonds are currently paying >7%. The biggest downside is you have to hold them for a year. The other issue is you're limited to buying $10k in a calendar year.
  - lotsofpulp 5y ago
    Currently paying. It is a variable interest rate, and it would behoove you to assume that if a treasury is paying 7%, then real inflation is much more. Hence the SP500 returning 30%.
    - xxpor 5y ago
      Sure, but if you're looking for the lowest risk thing that's paying at least CPI inflation. A lot better than cash under the mattress (or a savings account for that matter...)
- sokoloff 5y ago
  Over the timespan comparable to a mortgage? Broad-based equity funds. The worst ever 20-year return for S&P 500 was +6.4% per year for the 240 month period ending in May 1979. https://www.thebalance.com/rolling-index-returns-4061795 https://www.thebalance.com/rolling-index-returns-4061795
  - tspike 5y ago
    *assuming conditions over the next 150 years mirror those during the sudden rise of a single global superpower with control over the world's reserve currency and a continent full of unexploited natural resources at its disposal
    - 5y ago
Clubber 5y ago
>keep the cash in an investment account making > 5% APR vs. the house loan which presumably is in the low 3s. One is guaranteed, one is not. Markets are volatile. I lived through 2001 and 2008 as a working stiff, that shit can drop on a dime. Right now, I have no debts. House and vehicle are paid off and I have an "oh shit" account that's pretty good. I can sit here as a hermit for at least a year or two, three if I really hunkered down and pinched pennies. It's a good feeling; one less thing to worry about. Now if I put all that money into the market and shit hit the fan, not only would I not be willing to sell stocks due to their price plummeting, I would still have a mortgage and car payment. I'd be in this situation for 6 months to a year. Not a great situation. Ensure your freedom / ability to live first, then invest heavily, IMO.
- knappe 5y ago
  This is something you can hedge against, which is known as a sequence risk [0]. There are investment vehicles with built in volatility buffers designed to avoid this https://paradigmlife.net/blog/episode/the-volatility-buffer-how-to-reduce-the-risk-in-investing/ https://paradigmlife.net/blog/episode/the-volatility-buffer-.... That 3 years of cash on hand would be better off in some kind of investment and if you're worried, supported by a volatility buffer. [0] https://www.investopedia.com/terms/s/sequence-risk.asp https://www.investopedia.com/terms/s/sequence-risk.asp
  - foobarian 5y ago
    This illustrates why rich people are rich, and have an easier time getting richer. Even if they don't have time or aptitude to learn about this kind of thing, they have family or paid professionals to guide them.
phkahler 5y ago
>> Why would you pay off your house when you can keep the cash in an investment... I asked someone that in my mid 20's. He said "It's nice knowing I can support my family working at McDonalds if I have to." That stuck with me. Something fundamental changes in your life when you become debt-free.
- sangnoir 5y ago
  > Something fundamental changes in your life when you become debt-free. Being able to pay off a debt at anytime is equally freeing, for me at least. Paying off a loan with an interest rate significantly below inflation is not a great use of money[1] (and an opportunity loss). Putting that lumpsum into bonds (any bond with interest higher than the loan) is better, or even investing in stocks with a stop-loss. If I lose my job and have to flip burgers, that's when I'll pay off the loan and get a little extra from the investment/bond, thanks to the power of compounding interest. 1. Its the equivalent of someone offering you a 6- or 7-figure loan payable in 20/30 years at 2-3% when inflation is 6%, and you decline.
  - r0s 5y ago
    The opportunity loss is what I don't get. Without the debt you can take on new debt that could be say a rental property or business loan. How is a bunch of money tied up in debt, and an equal amount invested to hedge that not a huge opportunity sink?
    - sangnoir 5y ago
      It's hard to argue in the abstract without figures and expected returns. If paying off the debt opens the door higher returns, then I'm all for it. All things being equal, I'll keep $250k cash with a $250k mortgage at 2.7% today, as opposed to a paid-off house and a $250k hole in my account.
    - jandrewrogers 5y ago
      There is no loss of opportunity. You can borrow against invested money at very low interest rates, lower than mortgage interest rates, and people often do. In today's crazy real estate market, when people make "all cash offers" that is often just cash borrowed against securities. It is some of the cheapest debt that exists.