When Paying Off Doesn't Pay

Don’t misunderstand my comments. The absolute best is no debt and lots of cash (cash, stocks, bonds, etc). My whole point is that for the average person who is not financially independent, it’s much more important to have a healthy “cash flow” available to them from liquid assets rather than having all of their money tied up in an illiquid asset such as their house. If an emergency situation occurs such as loss of job or sickness, you don’t want to have to either beg to a bank to get some money back out of the house, or depend on selling the house quickly.

Better yet, how about the person with no mortgage and still $200K in investments. This isn’t an all or nothing situation. A person can pay the mortgage off quickly, and not necessarily all at once and then free up their income to bank the equivelant of a mortgage payment.

Imagine that $250K mortgage, at a 15 year term, is approximately a $2,000 monthly payment. If that is 25-30% of the household income, the household should be able to pay that mortgage off very quickly. Just to be conservative, say they pay it off in 10 years and use the last 5 years to save. That leaves them with a paid off $250K mortgage and $120K in the bank.

Personally I am not very tolerent of risk, as a result I would prefer to be debt free and to get there I am being very focused. As a result, when I reach that target, I will also be very intense in my saving/investment. You might be more tolerent of risk, that is fine for you.

The problem is that folks read articles such as this and think that debt is OK, even tho they might be more aligned with my thinking when it comes to their tolerence of risk. In addition, it helps to cement the habit of accepting debt as a way of life, then they use that habit to finance anything and everything. Before they know it their monthly debt payments are higher than their income. The result is that they never get that $250 you talk about in the bank.

Better yet, how about the person with no mortgage and still $200K in investments.

Well of course! But, for the average person, it much better to have a large chunk of liquid assets than a large chunk of illiquid" assets. Cash flow is king to weather through life's storms.

The problem is that folks read articles such as this and think that debt is OK

True.

“But, for the average person, it much better to have a large chunk of liquid assets..”

Except that I think the average person has no liquid assetts. Most people are spending more than they make. If they are focused on saving or getting out of debt, both scenarios are better than what is reality for most folks in today’s day and age...

So you have a couple of years of tax monies set aside and then you get laid off, eating up that money in a flash. THEN WHAT?

A couple of things. Find another job if you can. If you can't, sell the house and buy a cheaper one. I personally wouldn't spend 200 grand on a house unless I could be assured a high return on that investment. I could buy a house for half that that would be more than enough for my needs.

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