Net Worth Update March 2015 – Karl the Real Estate Agent (+14.31% q/q)

Capital is rare. Capital should be put to use to make money. I have a large mortgage on my house (HELOC style), and 1-2 times a year when a portion has been paid down I will access the funds and invest them. If interest rates were high, I would likely not do this.

Right now my mortgage rate is 2.2%, and I am able to get 8% and sometimes 10% with the funds. So for me it makes sense to forgo the guaranteed return of %4.4 by paying down my mortgage, and instead use the funds to generate 8-10% pre-tax returns.

You cannot pay off the principle of your mortgage because principles cannot be mortgaged, bought or sold. But you could try to pay off the principal of your mortgage… :-)

@R: you’ve just illustrated why so many people are terrible with money — emotions. Yes, we are all emotion driven: fear and greed. The thing is, to be successful with money, one needs to learn to detach from, or at least control their emotions and biases.

To point this out, you state: “their level of happiness and feeling of accomplishment would be huge, if it’s paid off. They will be happier going down the path that they chose.”

But that path is very short-term. They have chosen to fulfill a short-term financial goal that, as Ed pointed out in #19, could possibly have a big negative impact on their long-term financial goal. Think their mortgage-free happiness will still be with them in 30 years if they have to work an extra 5+ years to fulfill their long-term financial goals?
(FYI, event-happiness/sadness dissipates within months.)

The OP even admits: “I’ve been struggling with which approach I’m going to take and I have decided right or wrong for me the biggest motivator right now if paying off my principle mortgage.”

If his decisions have been a struggle and if he still doesn’t even know if those decisions are “right or wrong”…then why is he taking action?!

I wonder if he’s ever truly questioned why being mortgage-free is of such high importance to him and what is the true long-term potential benefit, stand-alone and vs. other strategies.

Money is merely a tool used to build the life you want. People very often are not skilled at using that particular tool and therefore very often end up with lives much different from imagined.

Here’s my two cents…

I know that it’s easier to become rich by thinking like an emotion-less, rational psychopath than an emotionally driven human being. And for many people, at least in theory, more money = better. However, there’s two factors that the pro-stock market for higher returns thinkers are not factoring in, specifically for Karl and his wife. Karl and his wife are not historically as good at saving money as they would like to be. Obviously, there is a real estate investing bias in that household. If Karl and wife are investing, like many of you suggest, into stocks, the emotional factor makes it more difficult than you give credit for. They are not as emotionally motivated to be frugal and better savers if their money is being invested in the stock market compared to the enthusiasm and reward that they get from working towards paying down their mortgage. Also, as many of you know, emotional investing in the stock market can have dire consequences. So my point is that if they invest in the stock market, they might end up saving less money per month to put in that pot because they are not as emotionally attached to that goal (regardless if it’s a path to greater wealth). Yes, I know that even if they save 75% as much because they don’t like the strategy as much, they may still come out ahead investing in the stock market.

Secondly, they are hoping to be mortgage-free in 3 years. Besides the higher savings per month that brings, in 3 years, their level of happiness and feeling of accomplishment would be huge, if it’s paid off. If they don’t have that, they could be unhappy for several years, regardless if their net worth is growing more quickly.

I think people need to pick their battles. And I think they’ve chosen wisely. They will be happier going down the path that they chose. And you can’t put a price on happiness.

That being said, I have no interest personally in being mortgage-free. I don’t currently, but will eventually do the smith manoeuvre and take advantage of low interest debt as much as possible to gain higher returns elsewhere. That makes me happy. I’m not afraid of good debt.

I think that Karl was descriptive enough about how he felt about this strategy for him and his wife for us to understand that this is what will work for them specifically. He never said that this is universally a good strategy or that it would work for anyone else. To each their own.

Cheers!

@Mikek: you need to go back and re-read the OP’s upcoming strategy — “throw everything at the mortgage on our home”.

He will have $150,000, more or less, available for immediate allocation, and he’s putting it on his mortgage instead of into other assets (e.g. stocks). He will also allocate ~$100,000 over the next three years to his mortgage. A standard payment route might require $25,000 or less over the same time period.

What if he allocated the same amounts, $150,000 + $35,000*3, to stocks (or any other investment asset) instead of his mortgage? His interest savings will be far below any gains from investments. (And, no, my estimates were not inflated. As previously questioned, no one does math any more?).

I’ll use myself as an example: I have the means to pay off my mortgage in its entirety but I chose to invest that amount into other assets. I’m seeing very, very healthy double digit returns on that money as opposed to a guaranteed aggregate ~3% (which is also something that people don’t really understand). In another 20 years I’m confident that initial amount, allocated to other assets, will provide much greater wealth than if I had paid off my mortgage.

The “guaranteed return”, using my example in #18, is $275,000 (it’ll probably be less because I used a pretty high rate). But that’s over 25 years. Once he pays off his mortgage he doesn’t automatically get a $275,000 “savings” cheque in-hand. So his “guaranteed return” is now not only spread across 25-years but the rate is locked-in and subject to inflation erosion — the fabulous guaranteed return has already been gobbled up by inflation! His allocation will also be locked-in to an extremely localized position; considering his income is generated and effected by the same local forces, perhaps not a great idea. (Yes, I understand one has to live somewhere, but one does not have to put all their money all at once into one geographic point.)

Put another way, would you put 50% of your net worth into a 3% long-term bond right now? I sure wouldn’t. But then again, maybe I’m not Canadian enough.

Perhaps it’s a misunderstanding of holding debt scaring people into short-term tunnel vision which leads to actions such as throwing everything at the mortgage, and blinding them to actual wealth building opportunites.