Overpaying Your Debts? Why?

Here is a thought I’ve been having lately, and it has to do with paying down debts.  Now, let me preface that I am talking about manageable or constructive debts.  Things like mortgages, car loans, or college loans.  I am not referring to 20% credit card debts or the debts you have with Bubba, the local bookie’s enforcer.  Keep that in mind when you read this blog, please, as it is a very important distinction.

Paying Down Debt Aggressively

In any event, the question I get all the time is, “Should I be paying down my mortgage (or other constructive loans) aggressively?”.  Many times, people say they know it is a “stupid” thing to do, to pay down lowish interest rates versus investing those dollars at higher interest rates.  On the surface, and under it as well, this is a very true comment.  It is also a true comment that sometimes it feels better to know you don’t have a debt looming over your head.  This often rules one’s habits and actions, rather than making the correct mathematical decision. 

Now, here is where my thought comes in, and it is a rather simple one.  The thought is this: Why take current money and use it to pay down future expenses?  In theory, that is all you are doing when you overpay a debt like a mortgage or car loan.  The reality is not only that, generally speaking, these loans are fixed and never go up.  All the while, the rest of your life and income, along with assets, are continually inflating upwards.

Money Now or Later

Would you rather have a $1 in your pocket now or a $2 in your pocket in 30 years from now?  Honestly, I don’t think that decision is all that tricky.  Take the money now and use it to either live life to the max/or earn more on your money for later. 

Heck, I’ll make a bet with anyone who wants.  You overpay those debts and pay things off aggressively, vs. me taking those same dollars and investing the overpayment dollars simply in the markets.  When the debt is paid off prematurely, let’s compare notes.  Let us see if the dollar amount in my scenario, that is liquid and invested, is enough to pay off the remaining mortgage at the same time you have paid off your debt prematurely.  I’ll bet you dollars to donuts, never understood that saying, that not only will I have enough liquid dollars to pay off the debt at the same time, but additionally, there will be extra dollars left over that you can do whatever you’d like with.

It all goes back to the principle that a bird in the hand is worth two in the bush.  Who cares about my 93rd mortgage payment, you know when I’ll work about that?  In about 7.75 years from now.  Paying it down aggressively doesn’t do anything to boost my assets or grow anything faster; if so, there would be a better argument to be made.  Rather, you know when I’ll worry about that 93rd payment?  You guessed it, 93 months from now, when my assets, incomes, and net worth are all much higher than they are today. 

Do you know anyone who would go to their gardener, or hair stylist, and say Hey, look, here is $50,000 today so that I don’t ever have to pay for a hair cut again or my lawn.  You would be ridiculed by everyone you know, except me, despite my wife saying I lack empathy.  What you would say to that person is, “dude, pay as you have to and keep the money yourself for the time being.” 

Ben Franklin

Trust me, I know how good it feels to pay off that mortgage.  I also know how much better off I’ve seen people who avoid the temptations and reframe their thinking.  Remember, Ben Franklin infamously said, “Why put off tomorrow what you can do today?”.  Your friend Andrew Rosen is saying, “Why pay for an expense tomorrow when you can do so many more constructive things with your money today?”.  I’m a long way from being confused with Mr Franklin, but the logic holds up just as well.

Hopefully, this resonated with some of you, and I am always up for a good debate, so bring it on!

As always, stay wealthy, healthy, and happy!