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How I Lost A Fortune Getting Out of Debt

by J. Money on Thursday, December 22, 2011

handcuffs

(Guest Post by Todd R. Tresidder — A great guy with a rather interesting take on his self-proclaimed “mistake” — I don’t know if I’d call it that, but how do YOU see it?)

I thought it was a smart move, but I guess I still had a few things to learn.

The plan seemed simple enough on the surface. I would buy a little two bedroom condo one block from the beach on the shore of Lake Tahoe. I would finance it with one of those garbage loans that suck you in with an unrealistically low teaser rate.

Yep, these are the same loans that got so many people in trouble during the real estate crisis. They trap you with a teaser rate so low you could afford the Taj Mahal, but then a year or two later the interest rate resets to reality and presto – your payment suddenly gets a lot less affordable.

But remember, I had a plan. I was smarter than that.

My plan was to pay it off during the teaser rate period so those dirty little bankers wouldn’t make squat off me. I was careful. I checked the terms of the loan to make sure there was no pre-payment penalty or small print to get hung up on. I dotted my I’s and crossed my T’s.

Everything looked like it should work  out brilliantly. I signed the loan docs, moved into my beautiful home, and started the debt payoff plan…

Smooth Sailing… At First

Throughout the next year I dedicated every dime that passed through my hands to paying off that loan. This was war and I was a man on a mission: It was me against those profiteering bankers and their rigged loans. There could be only one victor.

But I had an ace up my sleeve. I was making a fat income at the time and the loan balance melted away right on schedule. By the second year it was time to throw the first (and last) mortgage burning party of my life.

I celebrated. I beat the bankers at their own game. Victory was mine!

The condo was paid for. It had risen in value more than the cost of the financing. I was feeling pretty smug at my brilliance. I owned my home outright. I was free and clear. What could be wrong with that?

Seemingly nothing, but then it happened…

What I Didn’t Plan For…

My investment portfolio doubled the very next year.

Now I know you are thinking, “Poor little Todd. His house is paid for and his investments doubled. Woe is me! My heart bleeds for you.” It’s a great situation, admittedly. But here’s the problem.

I just spent the last year tying up a fat pile of cash into a piece of real estate. I suddenly woke up to the reality that all the money that went to paying off the house would have been sitting in my investment account instead.

… and it would be worth twice as much as that darn house. It would have doubled!

Instead, it was tied up in home equity that was barely going nowhere.

The undeniable financial reality is that I left a fortune on the table by paying off my debt. I would have been far better off carrying the debt with a normal 30 year fixed rate mortgage and investing the surplus. Assuming a $150,000 first mortgage,I was $150,000 poorer than if I had just carried the loan like every other indebted American.

But It Gets Worse…

And if that doesn’t get your goat then consider this.

I was in my 30’s at the time. That theoretical $150,000 could have compounded to become many millions over my long lifetime. It isn’t just the 150K I left on the table. It is the lifetime compounded value of that 150K (which is millions).

Hey, but at least I don’t have that monthly payment.

Hmmm…

So next time you get all fired up about paying off debt, recognize the equation isn’t as simple as it sounds on the surface. There are two sides to every story…

The Art And Science of Paying Debt

There are two sides to the “paying off debt” story – the art and the science.

The science of paying off debt is black and white clear. You place your capital wherever it provides the highest after tax return.

In my situation that was my investment accounts. For other people the answer might be paying off debt. There is no right-wrong answer that can be generalized to everyone; however, there is one right answer for you.

The other side of the coin to paying off debt is the art side – which is more subtle (as art usually is). It has to do with your emotions, goals, and happiness.

For example, I succumbed to the emotional appeal of being debt free even though I knew my investment accounts had a higher after-tax return. I love minimizing my cash outflows, and I deeply dislike owing anyone for anything.

Debt is the antithesis of freedom. I love freedom passionately so I loathe debt even more passionately. That was why I paid off the mortgage. It was an emotional thing.

I view my financial picture like a business so the less cash that goes out the stronger my “business”, the lower my risk, and the less I have to earn to sustain any given lifestyle.

It all sounds very logical from an art standpoint, but it is really just rationalization for an emotional decision. At the end of the day math rules your wealth equation – whatever provides the highest after tax return is what determines the financially best choice.

Emotions are a different thing… so I ended up paying off my debt.

And it cost me a fortune.

——————
Todd Tresidder is a money coach with an unconventional take on personal finance… like why everything taught about the money you need for retirement is wrong and why variable annuities are a bad deal for almost everyone except the salesperson. He leaves the getting out of debt stuff to guys with far more experience living with liabilities like J.Money.

EDITOR’S  NOTE: I’m still moving forward with Operation Mortage Payoff!  I’ll take the emotional side any day – especially when you never know what’s around the corner ;) What do you guys think?

(Photo by petercastleton)


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{ 35 comments… read them below or add one }

1 KC @ PsychoMoney December 22, 2011 at 6:41 am

It’s a good point and something to think about, but it comes back to the idea that nobody has the crystal ball. If Todd was doing this in 2007 and it was now the end of 2008 looking back he would be considered a genius of sorts. But there are a lot more variables here to consider as well.

I think more people need to focus on paying off your mortgage until you are good with your money and you know what to do with it, then as you get good with your money and find other amazing investments then put your money to that.

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2 The Frugallery December 22, 2011 at 7:51 am

Hindsight is 20/20. Things could have easily gone the other way. You could have put all of the money in the market instead of into paying off the mortgage. If the market had gone down, you could have lost all or most of the investment and then you’d have a mortgage to pay off. Yes, there is a chance your investment balance could be higher, but I think the safety you bought yourself is worth more. Congrats on paying off the mortgage!

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3 David Damron December 22, 2011 at 8:01 am

Though it would have been nice to be in the market at that time, you had no clue that the market would double. The market could have just as easily tanked and you still would be sitting on a huge loan.

I am not saying you shouldn’t have put it in the market or done anything specific. I am saying regretting your decision to buy a condo in Tahoe, which is AMAZING, might be the wrong thing to do.

We could all live in the What-If scenario. What if I bet on red instead of black? What if I worked out for 2 hours per day instead of 1? What if I worked an extra day of overtime instead of working on a passion project? We could always say what-if, but we would always be frustrated about the grass being greener on the path we didn’t take.

If we are attacking our goals in the way we see fit and approach with full vigor, we should appreciate the success we have and just continue to be happy if we are headed in a good direction.

David Damron
PauseandPonder.com

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4 dojo December 22, 2011 at 8:10 am

Well, that’s a LUCKY situation. Reality for most people is not that nice. What stops you from investing now and becoming a millionaire or anything? What would have happened if you didn’t pay your home fast and got the ‘nice’ intrest? What if you lost your job? No, it cannot happen to me doesn’t ‘fly’. All those Americans who are not foreclosed thought they had excellent jobs and nothing can touch them. And they’re now in deep trouble.

I’d say people should STOP buying on credit. You cannot pay for it? You cannot afford it. Or at least most should do as you did: put everything into the fight and get out of debt ASAP. No matter how you spin it, paying your home fast was smart.

Now you can put that hefty paycheck to work in investments (good investments will always be here, it’s not that good opportunities will never come. Start slow and you’ll make it. You have a HOME and zero debt, it’s not nothing ;)

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5 Diane December 22, 2011 at 9:29 am

That investment could have done down and then you would be crying about making a poor decision. This way you own something tangible. I had the opposite experience from you, and am now rededicating myself to paying off my CA house. I want the certainty of it. Nothing can replace that for me, not even my portfolio.

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6 cashflowmantra December 22, 2011 at 10:07 am

It seems like the other comments really echo what I am thinking. There is no way to know ahead of time that the portfolio would have doubled. And who is to say that it will stay there. Those are just paper gains until the portfolio is sold. Lots of fortunes have been made and lost.

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7 Brian December 22, 2011 at 10:12 am

Yeah, it stinks that you could have made more money, but I also could have won $600 on a slot machine in Vegas (on my $2 bet) but I didn’t. Like others have said, at least you have something tangible and fulfill one of the more basic needs according to Maslow.

Having a free and clear house has allowed me to travel more and save more for the future. It’s a truly great feeling and while I understand you lost opportunity (they don’t call it opportunity cost for nothing!), I think you are minimizing what you have accomplished.

Great article and I enjoyed reading it. Hope to see you as a guest poster again!

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8 Long December 22, 2011 at 11:09 am

I think you did the right thing by paying off the house. It’s hard to look back and think about how much money you could have made by investing it, but being free of debt is life changing. You just never know when you might get sick and not be able to work anymore, like my parents. Not having that mortgage is HUGE. The extra cash flow helps pay for expensive medications and other needs. If they used the money they would have paid into the home for investments instead, they would have lost their shirt during these last few years and would have a lot of trouble paying the mortgage and medical bills at the same time.

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9 Jeffrey Trull December 22, 2011 at 11:16 am

I guess I’m with the “you didn’t know the stock market would do that crowd” but I will add that it doesn’t really seem like you even considered investing in the market instead of a house before you took the loan, right? If that’s the case, this seems to be much more of a learning experience that others seem to be catching on to.

This issue has undoubtedly cost many, many more Americans a fortune as well as you’ve pointed out that “investing” in a house isn’t always the best investment.

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10 Kris @ Debt-Tips December 22, 2011 at 11:30 am

Great article. So many people work just the numbers when it comes to finance, and sometimes forget about logic, and priorities. Not that I’m entirely sad for you but its a good lesson to share anyway.

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11 Newlyweds on a Budget December 22, 2011 at 11:50 am

If you wouldn’t have had the condo and had the cash instead, who’s to say that you would have invested it all in the market anyway? And on top of that, the market has been so volatile–if you HAD invested the money, and then kept investing–you probably would have lost all that money anyway.

Sorry, I just can’t feel sorry for you or the situation. Omg, you have a house paid off? poor you.

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12 Nicole C. December 22, 2011 at 12:37 pm

Great article. I feel the same pain. I was too focus to pay off my student loan(took 2 years and half for 20k), and I missed the bull stock market in March 2009. I am working on to catch up my retirement savings now.

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13 Bryan at Pinch that Penny! December 22, 2011 at 12:41 pm

Hi Todd, quick question: are your diamond shoes too tight as well?

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14 Brad Hall December 22, 2011 at 1:14 pm

I went to his website and suffered my way through for a bit TL;DR but with the choice of words, overdrawn and dramatic tone it kicked the ol’ bullshit meter on high way before I even got to the secure download button. Cudos to the Budgets are Sexy commentators for seeing through this crap.

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15 LB December 22, 2011 at 2:02 pm

Who cares if your decision to pay off debt was based on emotion, learn from it and move on. Sell the house and put the money into retirement or stock if you feel so badly about it.

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16 Todd Tresidder December 22, 2011 at 3:03 pm

Great discussion so far (with the exception of a few unwarranted false accusations)

Jeffrey Trull really nailed it…

The point was to create a fun look at the other side of a topic that is generally ignored – the opportunity cost of paying off certain types of debt. Jeff was right. I foolishly never even considered it. I just approached the process like it was an obvious decision that required no deeper thought. I was wrong. It did merit deeper thought.

That was all. That is the entire point of the article. It’s just supposed to be a fun story taken from my life to illustrate a completely valid point.

I’m not trying to invoke sympathy for the situation (which would obviously be ridiculous).

I’m just trying to point out that there are two sides to every coin (including paying off debt).

My hope is you will learn from my experience and think it through and not just run on a false assumption like I did.

There is not right/wrong answer that is universally true for everyone and many of the statements above about how it could have worked out the other way are 100% true.

Again, great discussion in general (except for the isolated personal attacks).

Thanks for sharing your thoughts and furthering the discussion…

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17 Maria Nedeva December 22, 2011 at 3:52 pm

I think that there is something here. No, Todd could not have known that his shares will double. But the lesson from this story is not about that; or about ‘the mistake’. It is about the fact that our financial decisions can’t be and are not ‘rational’ however we try. Emotion plays a major part – and with this I do agree.

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18 Todd Tresidder December 22, 2011 at 4:14 pm

Excellent point, Maria!

I agree. Thanks for emphasizing that.

I also want to add something else that has been overlooked in this discussion…

So far everyone is focused on two main points – the security of owning your own home and the opportunity cost of not having that money in other investments. Both of these points are perfectly valid.

However there is another point that hasn’t been mentioned…

Mortgage debt can be a wealth building tool during inflationary times. It allows you to short your currency through long-term, fixed rate borrowing on an inflation adjusting asset (housing) which grows in value while the dollars you repay it with go down in value.

Right now, with 30 years mortgages at artificially low interest rates because of the ongoing financial crisis, it is entirely possible that inflation will exceed the cost of interest over the life of the loan (due to excessive government debt levels causing inflation). This is a relatively rare but not unprecedented situation.

This happened before in the 1970′s and created real wealth for borrowers while bankrupting the Savings and Loan industry (lenders) because they were on the wrong side of the trade.

In other words, there is a “time value of money” component to this discussion that has not yet been explored.

Again, my point is paying off your mortgage is not the obvious decision many people think it is. There are many dimensions to this discussion.

Maria pointed out the “emotional” component. Others pointed out the “security” and “investment opportunity cost” components. Now we have the “time value of money” and “wealth building strategy in inflationary times” component.

Each is equally valid.

What other components have we missed?

This decision is far more complex than it appears on the surface…

… and that is the point.

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19 Mark Kesler December 22, 2011 at 6:46 pm

I have no desire to ever own a home again regardless of financial ramifications. In my opinion it is a money pit and a millstone around my neck.

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20 Steve Farwig December 22, 2011 at 7:33 pm

Hi Todd,
I thought you might be up to something! This article just seemed a little too sophomoric for your typical thought provoking articles. You did a good job of baiting the conversation about a topic most of us are thinking about or have thought about. I just have to say that if the readers here have an interest in becoming financially free then read and learn from Todd’s website http://www.financialmentor.com. He has a treasure trove of information much of which is common sense that most people don’t seem to have when it comes to becoming financially free. I am hoping for more inflationary times but even if it doesn’t happen anytime soon I would rather risk a little and invest in my own business than pay down deflating property or save it at less than 1% per year. Thanks Todd for keeping the conversation going.

Steve

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21 Todd Tresidder December 22, 2011 at 7:50 pm

Hi Steve,

Thanks for joining the conversation. You must have found the link from my Facebook page or Twitter stream. Yes, my guest posts are different from my site (since I’m a guest and people don’t know or trust me). J.Money and I became friends at a recent conference where he told me his goal of getting mortgage free so I shared my experience of similar. He thought it would be a thought provoking guest post and I agreed. It’s been fun connecting our two communities.

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22 StackingCash December 23, 2011 at 3:23 am

WTF?!?!?! You put this here to draw me out, J? I’m going get a HELOC, apply and max out a bunch of credit cards, get personal loans from banks and everyone I know, and then stick all that cash into the stock market and I’m going to double my money because Todd Tresidder says so! Go into debt to invest in the stock market, that is pure genius!

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23 Dannielle @ Odd Cents December 23, 2011 at 4:54 am

Hmmmm. I think that if I was in your shoes, I would have paid off that mortgage too. I wonder what the value of your property is now… Here in Barbados, property values keep rising at an alarming rate and my goal is to get my mortgage/ loan paid off as quickly as possible. The interest rates are low too and I would definitely prefer to take advantage of that while I can.

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24 Todd Tresidder December 23, 2011 at 2:55 pm

Stacking Cash – You might want to read the article and comments more closely. I think you missed the point…

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25 Andrew December 23, 2011 at 9:36 pm

Good read, interesting perspective. Thanks.

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26 B Johnson December 24, 2011 at 12:33 am

Sadly, many of you that read this article have missed the point. It isn’t about payoff your mortgage or not payoff your house and invest in the market. In my simple opinion, he is trying to point out that people sometimes get so wrapped up in a thought, goal, strategy that they lose sight of the big picture. There is an oppurtunity cost for each financial decision that you make and this is something that needs to be considered relative to the big picture.

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27 J Thompson December 24, 2011 at 9:30 am

Everyone knows that you should pay off your highest interest debt first, but then the next thing to consider is whether you can save at a higher rate than your highest interest debt. So other than credit card debt, it’s almost always more worth it to invest rather than to make prepayments on debt. You guys are right, noone knew the market was going to double (so quickly at least) after the financial crisis. The author still makes a good point. Most mutual funds doubled in the past 10 years, so getting somewhere around 7% annual interest which will still puts you well above 5% after taxes even if you’re in the highest tax bracket.

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28 Romeo December 24, 2011 at 1:53 pm

I’m with you, Todd, though I’d rather keep my money liquid and pay my home in full once the mortgage balance is saved, as opposed to putting $2000 towards a mortgage every month.

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29 guest December 24, 2011 at 4:32 pm

At least no one can take away your home now since it’s paid off. Honestly I would have paid off the home too. You have the rest of your life now to make investments and save for retirement. It’s really not that huge of a problem. Dave Ramsey says to pay off your mortgage and I agree with him. You need a place to live after all.

I wouldn’t want to rent for the rest of my life, I do that now and I hate renting. Honestly I don’t see how this was a problem or mistake at all. Its not as if the market won’t double again in your life. There are trade-offs for everything you do in life, what’s wrong with that?

IMO it was not a mistake paying off the house. So you made a trade off. That’s how life works. It’s the grown up world we live in. Personally I think it was a great thing, but if you don’t think it was, you can sell it, rent or buy a 90,000 dollar house and put the rest of the money back into the stock market.

If there’s anything I learned from the great recession is that if you have a mortgage, then the bank could come in anytime and take it away from you if you hit hard times. So I’m on the Dave Ramsey camp of paying off your debt including your mortgage. I mean seriously you have the rest of your life to invest.

If I were you I would be happy that I had a paid off home and I had the rest of my life to invest and win in the stock market.

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30 Todd Tresidder December 25, 2011 at 1:20 am

B Johnson – I couldn’t have said it better myself… Thanks for the insightful comment.

The story is like a parable. It illustrates a point. That is all.

Don’t assume conventional thinking is correct. There are many dimensions to most financial decisions – even when they appear obviously true. There are tradeoffs that must be considered.

This story acts like a mirror where we can see our stuff in it. If you land with both feet inflexibly on one side of the fence then that is your stuff. You are seeing your issues head-on.

For example, when commenters lampoon me with personal attacks for sharing my story then that is their stuff. When they can’t see past getting out of debt to see where it might be advantageous to carry long term mortgage debt in certain situations then that is their stuff.

There is no universal truth. The future cannot be predicted. I certainly got it wrong, so be careful what you assume to be true. That was the mistake I made.

After all, if paying off your mortgage and getting debt free isn’t a universal truth then what about all the other assumptions you hold true in your mind? Buy and hold, asset allocation, or maybe even the value of financial freedom?? These subjects are multi-faceted and deeply fascinating.

Things aren’t always as they appear…

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31 J. Money December 27, 2011 at 12:31 pm

Thanks again for guest posting while I was away, Todd! Loved the convos it sparked :) Even if they all weren’t 100% favorable, haha… that’s the beauty of personal finance though, eh? We all have our own opinions and ways of doing things. I think what I loved most about this though was that it was a complete different way of thinking of things – which is great to remind ourselves that not everything is black and white sometimes.

So thanks so much for sharing your story with us! Hope you had a blessed holiday my man, and let’s catch up soon :)

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32 Louise January 6, 2012 at 4:35 pm

I love this entry and reposted to my blog… There is always the “devil’s advocate” approach where you can counter that those high yielding investments were (in the majority of American’s cases) going to tank and that at the end of the daythe security of the house would have brought peace in a time of true stress!

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33 J. Money January 6, 2012 at 6:02 pm

Glad you liked it :) Have a great weekend!

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34 Todd Tresidder April 18, 2012 at 12:06 pm

Follow Up To This Post: I wrote this post based on a conversation J.Money and I had. It was designed to be fun and get people thinking differently about paying off their mortgage. However, the comments caused me to realize I needed to provide a serious guide to really help people sort these complex issues and balance all the misinformation and half-baked reasoning. Here is the definitive guide follow-up post to paying off your mortgage or investing (for anyone interested)…

http://financialmentor.com/financial-advice/pay-off-mortgage-early-or-invest/7478

Thanks J for helping me see the need to produce this guide. Hope you like it!

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35 J. Money April 19, 2012 at 1:42 pm

Awesome, thanks for the follow up man :) Funny where conversations can take you sometimes, eh? Hope you guys are well!

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