A Debt Free Life
My desire for a debt-free life led me to my current mortgage payoff strategy that I call X marks the spot. The American dream blows. Who’s idea was it to create a dream where everyone in it owes a shit ton of money to someone else, has to work for most of their life, miss the most important years of their kids lives, and then “retire” into what is supposed to be their golden year. It seems like a nightmare, not a dream.
The only debt my wife and I have is our mortgage. We are lucky that this is the case, as many others have a lot more debt than we do. I have been told that this is “good debt,” but there is no such thing as good debt for me. As long as I owe money, I lack freedom, and I don’t like that. As my wife and I get a little older, the idea of “having” to work vs. “choosing” to work has taken on a bigger meaning in our lives. We are very close to having a choice, and having a mortgage is our last big hurdle.
There are a lot of theories out there around paying off a mortgage. At this point, I think I have heard and studied them all. Some make a lot of sense, and others are just nuts! After a lot of thought, I have found what I believe to be a strategy that perfectly suits my money behavior and has a fun name: X Marks the Spot. The two main factors at play for me as I created our strategy were the potential opportunity cost of paying off our mortgage early vs. investing that money and the psychological safety that comes with zero debt.
Opportunity Cost
The idea behind opportunity cost is that by making one choice, you potentially lose gains by the choice you didn’t make. This can apply to many aspects of life, including your money and time. If I choose to go hiking today, maybe a missed out on seeing my kids play hockey. One of my favorite bloggers/podcasters, Paula Pant, says you can afford anything but not everything. We are constantly making choices that inherently exclude something else, and embedded in those choices is a potential loss.
In this case, if I choose to pay off my mortgage early through paying extra principal monthly, paying every two weeks, so I make one extra payment per year, or even a lump sum if I accumulate that much, I will be choosing not to use that money in another way. The money I send to the bank can and will not be returned to me, even if it’s extra. That money is gone, albeit in a way that guarantees me a rate of return equal to my interest rate. By doing any of the strategies above, I lose the ability to make choices with that money because I have chosen to give it to the bank.
You may be thinking, that doesn’t sound so bad. By paying early, I am guaranteeing a certain return rate, which is hard to do in any other way, and I am paying down my debt, which is my stated goal. You would be right on both accounts. This is actually a decent plan and one that I considered for along time. What I couldn’t get past mentally to actually execute this strategy was the loss of control over my money (the bank has it) and the potential opportunity cost of not investing that money.
Psychological Safety
No doubt paying off our mortgage early and having no debt would feel amazing. There is a sense of accomplishment, freedom, and peace of mind that comes with paying off debt. We want that feeling, and that is why I have put so much thought into this. As we enter retirement and officially stop working, I do not want a mortgage payment that is reliant upon a weekly paycheck. There is too much uncertainty around having to rely on a paycheck to pay for our housing. I want to know that I can pay the mortgage off in full if I want to. As I mentioned above, the goal is to have choices and flexibility. It is in having choices that I am creating psychosocial safety for us.
Is there anything wrong with chasing that goal and feeling? Nope! I reserve the right to do just that at some point. But for now, we have decided to forgo this feeling of psychological safety to pursue a plan that will hopefully provide psychological safety and reduce our opportunity cost.
X Marks The Spot: Mortgage Payoff Strategy
After carefully weighing my options and factoring in opportunity cost and psychological safety, we have dceided to pursue the X marks the spot mortgage payoff strategy. To be clear, I am not the inventor of this approach. I have pieced together a few different ideas to create one that works best for me. You should do the same. There is no one right way to do this.
We started by opening a brokerage account through Fidelity. This is a post-tax account that is separate from our retirement accounts. My wife and I contribute $700 a month to this account, which is then invested directly into a low-cost index fund. We chose VTI for this account. It invests broadly over the entire market, giving us a little more diversification and a little less risk than a fund that mirrors a smaller swath of the market. We will continue to invest monthly into this account over the next few years.
While the brokerage account is hopefully growing, we will continue to make our normal mortgage payments. After a few refi’s over the past few years, we have a low-interest rate on a 20-year mortgage. Each month, the principal payment is more than the interest payment, so we are finally on the right side of that line! Each month the principal and our debt are being reduced by more than $1000.
You can probably see where this is going. At some point (my estimate is about 8-9 years using a market average rate of return), the two lines will intersect, making an X. The balance on the mortgage and brokerage account will be the same, at which point we have choices.
What Will We Do?
We will have a few choices at that time and that is the whole point:
- Hold steady and keep investing and paying mortgage monthly.
- Lump-sum pay the mortgage by cashing out the brokerage account (I will have enough to account for taxes).
- Cash-out part of the brokerage account and pay off a percentage of the mortgage.
- Reallocate the investments to kick off more income and use that income to pay the monthly mortgage payments.
Right now, we are leaning towards #4. This choice gives us the most freedom and flexibility. We will have the psychological safety of knowing we have enough money to pay for our own home if we choose to. We will also not feel like we are sacrificing opportunity cost because the money will still be invested and working.
The X marks the spot mortgage payoff strategy works for us, for now. We may change our minds in the future, but in the meantime, we are still investing our money and paying down debt. So even if we take another approach, there is little downside to this plan.
There are a lot of beliefs around debt and mortgage paydown. The more people share, the more we learn. Please leave feedback in the comments section below about our plan or yours.
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