Monday, December 17, 2007

Debt Free or Free of Fear?

In Dave Ramsey's baby steps, step 7 is being completely debt free including the house, and being able to fully enjoy your money. It's living like no one else because you are debt free. Wow what a concept!

But I've pondered this and I being a scientifically minded person, I'm not sure if I'll ever convince myself or DH to retire our mortgage early. Meaning I don't know if DH and I would ever prepay our mortgage. We agreed our mortgage would be retired the month we retired, but any earlier is not necessarily part of our long term financial goals. So we might never be debt free until we retire.

But does that mean we won't be financially fit or at peace? I don't know. I have mulled this over a lot, bouncing ideas off of my DH and debating just rushing to prepay a mortgage. And that's how we came up with being "free of fear." What does that mean?

We discussed it, and I think I'll be free of fear when we have enough money in taxable accounts to pay off our mortgage and generate enough income to live. According to my calculations that will likely be by our mid to late 40s. So though we'll still be carrying a mortgage we'll be in a position to pay it off ASAP in case of emergency while still being able to live.

Have I made peace with not being debt free? Definitely, so instead I'm working harder at achieving financial freedom by being financially savvy enough to save my extra mortgage payments instead of spending it.

Most people prepay the mortgage because they lack the discipline to save the the amount and invest it. I could potentially fall into that category, however, I am a firm follower of automatic investing. I plan my budgets backwards setting savings as a line item before any other expenses including my mortgage/rent, etc. So I would do the same thing for saving my "mortgage overpayment" and investing it.


rbm411 said...

If you are a a disiplined saver/investor and you have the money to pay off your mortgage it would be foolish to do so.

First you get to deduct the interest from your income. Second you get to earn interest on the money in the bank so in effect you are using free money provided by the bank. Additionally, money in a house is passive. It does not generate more money. Money in a bank does.

Angie said...

I disagree with rbm411 - it's not "foolish" to prepay your mortgage. When you pay interest on your mortgage, you use after-tax dollars. Yes, you then get a tax break on those dollars IF your deductions are greater than the standard deduction. However, your income from the bank is taxable income, so it becomes a wash. If your investments are in the stock market, you run the risk of losing your money in a downturn, and still have to pay off your mortgage. So, "foolish" to pay off your mortgage, I don't think so.

That said, if you are more comfortable carrying a mortgage while having a big chunk of money in a SAFE place; then by all means, do what makes you feel comfortable! My bank (ING) pays interest about equal to what my mortgage interest rate (after tax write-off) is, so it's a financial wash. Personally, I hope to have my mortgage paid off before my oldest starts college (in 13 years) so that I can use the mortgage money to pay tuition. That's where my comfort zone is, but everyone is different.

Debt Dieter said...

I think you need to do what works for you and your husband.

Not having a mortgage going into retirement is still a major achievment these days, so I reckon knowing you have the money to pay off the mortgage but choosing not to to pursue other investments (if you have no other debt) is a great place to be!

Living Almost Large said...

My mortgage interest will always be higher than the standard deduction by A LOT. I live in a HIGH COLA place, I pay $6k in property taxes as is. I doubt highly I will ever standard deduct again.

As for interest rates and tax deductibility, we make pretty good money. So our dedutability is 25 or 28% minimally, likely only to go up. We're not even close to the 15% bracket which might make it a different story. Even if we have kids it won't matter. We've phased out of a lot of child credits.

So I think we're not going to pay off the mortgage a day sooner than RETIREMENT.

I love how people talk about not having a mortgage in retirement, but that's in PARAGRAPH 2 of my post.

I also don't know we'd be home owners versus renter in retirement. I do believe there is a possiblity we'll just rent because it does save a lot of money. It depends on where we live, our health, and our lives at that point. I won't rule out renting, because it can make financial sense.