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Monday, December 30, 2013

When making the wrong financial decision is the right thing to do

Every once in a while on the financial blogs and forums you will see somebody come in and pose the question "Should I pay off my house?"

Usually the people asking this question seem like they really want to, and anticipate the great freedom that would come with being 100% debt free. The next step is to do the math and find out if it is technically the 'right' thing to do.

The thing is, with rates as low as they are now, it is almost never mathematically beneficial to pay off your house early if you are investing that money instead.

At least on paper.

But that doesn't mean you shouldn't do it.

Technically working until we are 70 would give us more money too, but that doesn't mean it is the better option for us, because that is not going to maximize our personal utility and enjoyment of our lives.

There are many reasons why we want to achieve FIRE, but the two main reasons for most people are freedom and security. For a lot of people being completely debt free is going to maximize that sense of security to such an extent that it is totally worth sacrificing some extra money that may have been made over a period of 30 years if that money were invested instead. Just like the freedom gained from retiring early is totally worth the opportunity costs of not working for rest of our lives. Even though doing so would be the "right" thing to do from a purely mathematical perspective on accumulating financial assets.

For many people not having the house payment will make your living expenses so much lower, that even if something totally disastrous happened and you lost everything, MF global style, you would not need NEARLY as much to sustain your lifestyle. You could probably even make-do with a McDonald's job.

If you are the type of person would would be kept up at night thinking about how you could be earning 5% on money that you borrowed at 3.5%, then don't bother paying off your mortgage early. Technically the math is on your side, but again, it is really a matter of personal utility (which is why we are trying to retire early to begin with).

Personally I am torn on this issue. I don't like leaving basically free money on the table, but I really like the idea of having that kind of security. And paying off my house would drop my monthly expenses by a third. So I will really have a tough decision to make when my assets get to the amount that I owe on my house.

No matter what I decide to do at that point, it will be a nice decision to be able to make!

-The Money Monk

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