This should be an interesting topic! Everyone has a different philosophy for how they choose to invest. Some people choose to never invest at all.
My opinion is fairly balanced, but I have my quirks. It is important to get a perspective of my investment beliefs and profile before I share my reasons for paying down my mortgage over investing in bonds.
- 100% Equities, no bond allocation, diversified across 4,000+ companies.
- Married dual income no kids.
- 27 & 28 (Long time horizon and married a cougar.)
- Never want to retire yet aggressively pursuing financial independence.
- Believe in taking market returns via low cost index funds.
- Plan to be 100% equities until 40 when I will reevaluate.
- Currently own a home with a very affordable mortgage.
- Large emergency fund in place in case of job loss.
- Only debt is mortgage.
- Plan to be a lifelong home owner with the goal of having my home paid off.
- Not seeking to arbitrage my mortgage in hopes of better market returns.
I could go on and on but that would be boring. Now that you have a better understanding of my personal position lets dive in!
1) After tax money is being evaluated here.
After this space is taken up investors start to experience a tax drag when investing extra dollars. If you are investing in a taxable account, you must pay taxes on income and distributions. If you own real estate, you must hide the income via depreciation and other tactics and recapture it later.
When paying off the mortgage however there are no tax consequences allowing you to avoid the dreaded tax drag.
2) I enjoy the balance of a guaranteed return alongside aggressive investing.
The stock market has been on a tear and it has been good for aggressive investors. Yet we all know that there will eventually be a correction.
When it will happen is anyone’s guess. Regardless we took out a mortgage on this home that must be repaid.
Watching the balance move down and locking in a guaranteed return is very rewarding when paired with an aggressive portfolio.
3) Liquidity is not a concern.
Most people think paying down a mortgage is a sin because of liquidity issues. This is not a big worry in my opinion because of a well-capitalized emergency fund and no other debt.
I can live for CHEAP if needed and would do what I must do in a bear market.
Many make the mistake of over extending themselves when they initially purchase a home. This sets them up for failure if they face financial troubles in the future.
Our home is very affordable and extremely conservative. We were lucky to buy when we did, and our mortgage is much lower then comparable rents in our area.
If the market corrected hard we would not be in a crisis to come up with the monthly payment.
5) Interest rate on the mortgage is greater then bond rates.
Simple arithmetic here. Understanding that bonds are measured with total return I feel confident that my mortgage will be a better return for the next 5 years.
6) We will no longer itemize with the high standard deduction of $24,000.
The tax break argument doesn’t come into play with the new standard deduction. Our interest is not that high because we don’t have a massive loan.
7) I value flexibility and seek it early in life.
Everyone has a different reason to pursue financial independence. My number one reason is flexibility. Life gets me excited when I am living on my terms.
Having one of my biggest expenses taken care of with a paid off home will give me the flexibility to take on new challenges. When you’re not stressing over paying the rent/mortgage life can become more simplified.
There are my seven reasons I choose to pay down my mortgage in lieu of bond investing. Make sure to let me know your thoughts in the comments.
What Are Your Thoughts?
- Am I a mad man for not having a bond allocation?
- Do you think paying off a mortgage is foolish?
- What is a quirky investment philosophy you follow?