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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308722  
Subject: Re: 10% solution Date: 10/31/2005 4:19 AM
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<<What is the consensus on this point?

There are two parts to the question. The first part is easy. Do not give up a significant employer match to quickly pay down a mortgage.

The second part is more complicated and is less likely to have a consensus. The second part has three possible answers: 1.) pay off all debt as soon as possible, 2.) balance your investments and mortgage/student loan payoff, and 3.) do not even pay off a mortgage early. I recommend a balanced approach that would pay of a mortgage somewhat early and allow for other investments.
>>



This has been a good thread because the ambiguities of making these kinds of decisions have been respected. There is really no universal, textbook answer. It depends on personal values and circumstances, and a variety of different answers can be good for different people.

The people posting here are trying to decide what might be best in the future. In my case, how to handle this situation is something I decided years and decades ago, so the decisions I made can be measured against the facts of what actually happened.

In 1979 I hired in as an office clerical employee with a utility company. I was essentially broke at the time, but had no debts at all.

At the time, I decided stocks were 'way cheap, since it was possible to buy the shares of great companies at 4X depressed earnings. Interest rates were at all time record highs of 20%/year or so short term.

I began saving about half my after tax income and investing every nickel I could scrape together in stocks. By 1985, stock prices were way up and interest rates had come down quite a bit. I bought the house I live in on a 95% mortgage, bought a rental duplex the next year on a mortgage and a rental house for cash the next year.

At that point I had no debt except mortgage debt, and substantial assets in real estate and stocks. I had to decide what I was going to do with my free cash flow from savings and investments in the future.

I basically split my savings between paying down mortgage debt and buying more stocks. By 1995 I had paid off the mortgage on the rental duplex and by 1997 had paid off the mortgage on my house. At that point I was debt free, had income from my job as a utility company repairman plus income from three rental properties, dividend and interest income plus income from the independent repair business I had started in 1994 and no debt. I now was free to go back to investing most of that free cash flow in the stock market.

By 1999, I was easily financially independent and had no further need to work for income unless I wanted to do so. I quit my job with the utility company and sold off the rental duplex, realizing a large chunk of cash and sharply reducing the amount of work I did.

So in twenty years I went from being broke to financially independent based on limiting consumption to half the after tax income from my regular job, and investing all the other cash and income that came my way.

With benefit of hindsite, my assets would have grown even faster had I done nothing other than investing my savinngs in the stock market. My assets would have grown faster than they did had I not paid down the mortgages and invested those dollars in stocks.

Stocks were rising faster than anything, so WITH BENEFIT OF HINDSITE, anything which would have increased stocks bought would have increased my assets today over what I did.

But so what? No one has the benefit of knowing what will happen in the future. My strategy gave me substantial protection from economic adversity, with declines in real estate and stock prices. I also gained a measure of financial security by diversifying my assets into real estate. That financial security was important to me, and well worth the cost of diversifying assets away from the stock market for a while.

In the end afterall, the cash just kept and keeps flooding in.

The key to wealth for me was not so much decisions about whether to pay down mortgage debt or not, it was how much of my income to consume and how much to save. You will note that I lived on half the after tax income from my regular job, and invested all the rest of my available cash flow, including divident income, rental income, savings income and income from my repair business. As my income rose from various new sources of income, it went into savings and investments, not new consumer spending. Under such circumstances, assets were pretty much bound to increase exponentially over time. In fact, stock and real estate prices continued to rise as a rule. Stock prices went up faster, but returns from real estate investments were very satisfactory as well.

This thread has concentrated on examining the relative advantages of different kinds of investment (stock vs real estate) and the relative advantage of holding mortgage or other debt compared with investing in assets. Those are reasonable questions to ponder and make decisions about.

But I suggest that a more important key to wealth is your rate of consumer spending versus saving. In those early years, it is your ability to create savings which will largely determine your ability to invest in assets like stocks and real estate. It's far more important for a person who wants to increase wealth rapidly to keep their expenses low in order to maximize savings for investments than worrying too much about relatively unimportant details such as how fast to pay down a mortgage. That makes a difference, but your savings rate is probably much more important.

If you follow that strategy, you will PROBABLY become reasonably wealthy. At that point you can cut your work effort and increase your spending substantially and the cash will STILL come flooding in. The return on assets will tend to dwarf spending at a certain point.

Here is the really peculiar thing I have found: suppose a person's goal is to be able to maximize the amount of spending they want to do over their entire life. What should they do to maximize that lifetime spending?

I would suggest that they should minimize spending in order to maximize savings and investments early in life. That way they will acquire investment assets as rapidly as possible which can be expected to produce returns that can be reinvested. Over time, your investments will grow to the point that investments returns will dwarf the income you produce from working, and take on a life of their own as compounded investment returns increase exponentially.

At that point, you can increase spending dramatically and still compounded investment returns will keep your assets growing.

So---- to maximize spending over a lifetime, save heavily when young so that you can spend luxuriously when you are older.

Unfortunately, the prevailing consumer ethic tends to favor doing just the reverse. Ironically, this leads to a REDUCED ability to spend over a lifetime, since interest charges and investments not made reduce assets, income and hence ability to spend.



Seattle Pioneer



Seattle Pioneer
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