Should You Pay Off Your Mortgage Early or Invest?

Let's talk to Shelly in Nashville. Shelly, how are you? Hey Dave, I'm doing good. How are you? Better than I deserve. How can I help? Hey Dave, my, uh, my mortgage is negative 17% per year. Should I pay it off early? Oh yeah. You got to pay that mortgage down. Even if the bank is paying you to take out your mortgage with negative interest rates, you got to pay that sucker down. Hey everybody. Welcome back to whiteboard finance. My name is Marco and I'm here to help you master your money and build your wealth. I have a banger of a video today. It's going to be very spicy because it's a subject where like 50% of the population is on the fence about one way. 50% of the population is on the fence about the other way. And this is in regards to paying off your mortgage early. And if it's a mistake or not, however, what spurred this was a huge tweet over the weekend that went absolutely viral by Mike Alfred, and we'll get into it right now. So he basically said that paying off your mortgage used to be a badge of honor. Now it's a sign that you don't understand how money printing and asset price inflation works. He then backed that up with this tweet, which was the next day, which was yesterday, the third, he said, I looked at the numbers today and I can pay off my 2.5% mortgage 15.4 times tomorrow using only the liquid part of my portfolio. So while I appreciate the outpouring of advice and concern from Dave Ramsey acolytes, I will continue to maintain a large mortgage and stack Bitcoin. Boom. Okay. So, uh, you don't have to dis you don't have to regard the Bitcoin portion of that tweet, but I'll explain to you why that's important. So Mike's a big Bitcoin or as I am as well. And when you go down the Bitcoin rabbit hole, and when you start to understand finance, macroeconomics, geopolitics, how the monetary system really works, then you start understanding asset price, inflation, money printing, things like that. You start to question the fed's balance sheet. You start to question monetary policy. And his tweet is well-founded. However, it probably wasn't well received by a lot of people that don't understand these things. So in this video, we're going to go through all of this stuff and you're going to have a better understanding about money. Uh, when this video is all said and done, uh, please like the video, please watch until the end. So if we go to the first part of his tweets or the second part of his first tweet, he's saying you don't understand how money printing and asset price inflation works. So let's talk about the time value of money. This is the core principle of finance. This is what I learned. This was one of the first things I learned when I got my finance degree, uh, about 10 years ago. Okay. I graduated in December of 2010 with the finance degree. This was literally in one of my first classes. What is the time value of money? The time value of money is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. This is a core principle of finance. A sum of money in the hand has greater value than the sum to be paid in the future. This is essentially saying that a dollar today is worth more than a dollar tomorrow. This as investors, if you're looking at a venture capitalist, if you're looking at a real estate investor, uh, when you're looking at discounted cash flows and trying to come up with a net present value of an item for today, uh, based on its future, uh, earnings potential and future cash flows, this is the core tenant of finance. So basically what Mike is saying is, Hey, why would I pay off my mortgage today at really low rates, which we're going to talk about in this video, historically low rates, to be honest, uh, when I can use that money and make a greater return somewhere else. But not only that, we're going to talk about inflation as well. So let's get into that. So inflation in this society with Fiat money, money printing and expansionary money supply and inflationary money supply, inflation actually helps borrowers. Okay. Debtors are winners in this society. Savers are losers. I've been saying this for years. If wages increase with inflation. And if the borrower already owed money before the inflation occurred, the inflation benefits the borrower. This is because the borrower still owes the same amount of money, but now they have more money in their paycheck to pay off the debt. A basic rule of inflation is that it causes the value of a currency to decline over time. So if I'm taking out a mortgage in year zero, let's say it's year 2021 year zero. I'm taking out my mortgage. Let's just say it's a hundred thousand dollar mortgage for easy numbers. And I'm working as a nurse. For example, I make 50 grand a year, 60 grand a year, depending on where you live. I'm getting increases in my paycheck by two, 3% every year. So, you know, the, the layman, the person who doesn't understand money thinks I'm getting two, 3% more. Look at that. My company loves me. The person that understands economics knows that inflation has been much higher than that for many months. Now you're actually losing money. You're losing purchasing power. However, that's a conversation for another video. I digress. I'll say that same nurse takes out her mortgage, a 30 year fix that two and a half percent, for example, but her salary actually increases with inflation. Say that hospital system gives her a 3% raise 4% raise 5% raise whatever, just so there isn't a anarchy on the streets. Okay. Um, so that nurse, they think they're making four or five, 6%, which is great. That is higher than the debt they owe on their mortgage. So the nominal number of their paycheck is going up. Their purchasing power may be just in tune with inflation. So they're not, their eggs aren't costing them any more or less than their paycheck increase. However, in year zero, it could be year 10, for example, with all these increases, there's still their debt and their rate is still year zero debt. It's still year zero rate, two and a half percent. For example, does that make sense? Their paycheck is getting bigger nominally. Uh, and it's also eating away, um, their debt in year zero on their mortgage. Okay. So now the second part of his tweet talks about, uh, asset price inflation. So if we look at, uh, the total assets of the federal reserve and what they hold, you can see here since basically 2003, uh, keep in mind, this is in millions, so these are thousands of millions. When you look at these numbers, their balance sheet exploded in 2008 after the great financial crisis. This is when Ben Bernanke was throwing out money out of a helicopter. You know, this was quantitative easing, one quantitative easing to, we're just going to print, uh, billions of dollars and basically save the economy. So this is what happened in 2008. A lot of companies were bailed out rightfully so wrongfully. So it doesn't matter. Uh, and you can see here, they started to taper off their balance sheet starting in basically 2014. So the numbers started getting smaller, smaller, smaller, smaller, smaller. And then all of a sudden what happened in 2020? Well, we had cervices sickness. And you can see their balance sheet has absolutely exploded. So when we go into the next chart, you can see here that the M1 money supply, this is literally money in circulation, money in existence, going all the way back to 1959, you can see what it's done. Uh, it didn't even do this in 2008, but look at what happened in 2020. This is literally hockey stick growth. Uh, you guys, so we're looking at, uh, 19,677, uh, billions. So this is trillion. So 19.6 trillion. Okay. So when we go further, uh, to, to further go through his point, when he talks about interest rates, he's saying today I can pay off my 2.5% mortgage 15.4 times tomorrow using only the liquid part of my portfolio. And he takes a little jab here at Dave Ramsey, uh, which in this case I agree with, normally I agree with Dave, with a lot of his behavioral stuff, his psychological stuff. Um, but Dave is keeping poor people poor in my opinion. Um, and I'll, I'll talk about that in another video, but from a behavioral standpoint, I do agree with, with a lot of what Dave has to say. So if we look at historical rates of a 30 year fixed rate mortgage going all the way back to 1971, Dave Ramsey was right. If you're paying off a mortgage early here, uh, because look at the interest We're looking at 16%, 17%, 18%. You know, these are crazy high mortgages. When you pay off your mortgage, you are making a risk-free rate-free, uh, excuse me, not rate-free risk-free tax-free rate of return guaranteed. So whatever your mortgage is, you pay that off. That's your ROI. Okay. That's your return. But if you look at here, basically since the mid nineties, we've only had a declining interest rates, actually not even the mid nineties. You can say even the late eighties to be quite honest, but now we're looking at historic all time lows. So if you look at it now, uh, in September of 2021, a 30 year fixed rate mortgage on average is 3%. Mine personally for my house is 2.49%. We locked that in last year. That's crazy, crazy low. That's, that's, uh, getting eaten away by inflation, which we talked about earlier in this video. Um, I'm still paying it off a little bit early, but it makes no sense to do that. But that's what we're going to get into in this video. Psychologically. So if we know that a mortgage, let's just call it is 3%, even though it's most likely going to be lower than that. The S and P 500 since its inception, uh, in 1926 through 2018, the average annual return is 10 to 11%. If you want to go, uh, since adopting the top 500 stocks into the index from 1957 through 2018, it's roughly 8%. So the index has returned a historic annualized average return of around 10% since its inception through 2019. So if my mortgage is 2.49 and I'm making 10% in the S and P 500, uh, mathematically, you can literally cannot argue with this over time. If the market has returned 10% and my mortgage is fixed at 2.49%. And I have a CPI, which is inflation at above 5% over this past year, basically eating away at that debt. Why would it make sense for me to pay off my mortgage? So let's go into, uh, the final chart here where you can see, uh, I know this may be a little bit small on your screen, but I'm trying to capture everything here. If you look at asset class returns over the last 10 years, and you look at it annualized from 2011 to 2021, Bitcoin is by far the highest at 230%. You have the NASDAQ at 20%. You have the S and P 500 U S large caps at 14%. Uh, and then you have your worst investment here, which have been commodities. Commodities have been absolutely crushed negative 4%, but they are making a comeback and I was following uranium for like a year and a half, two years now. And I wanted to put a ton of money in uranium. Uh, there's a uranium ETF at like, um, sorry, it was like $6, I believe. Uh, and now it's sitting at like 24 and I'm like kicking myself in the butt, but I digress, that's not the point of this video. So again, going back to these charts of returns, why would I want to pay off my 2.49% mortgage when we're making annualized returns of these amounts, um, over this amount of time. Okay. Over the past 10 years. So now let's get into that without making this video super, super long. And this is where I want you to comment down below and obviously like the video if you haven't already. On one hand, you have the opportunity cost. Okay. Hey, if I pay off my. You know, three, $400,000 mortgage. I'm not saying me specifically. I'm just saying in general, I'm paying off my three, $400,000 mortgage on day one year zero. You know, that has had time to compound at much, much, much, much higher rates. 10 X hundred X. If you're looking at Bitcoin literally, um, you know, over the last 10 years or so, I would be losing so much money and opportunity costs by doing so. However, um, people have certain life situations where they want that peace of mind and it's peace of mind, P E A C E. When I see peace, like P I E C E of mind, I want to like, nevermind. That's just me being OCD. Peace of what does that even mean? Peace of mind, like a puzzle piece. Like, no, it's peace, like tranquility, peace. Okay. Peace of mind. Um, so anyway, people have kids, people may have job loss. People may have, um, they may not have money in the bank. You know, they want to reduce their cashflow or their monthly expenses to as little as possible so they can have cashflow paying off their expenses and then technically be financially independent. There's a million and one reasons why people choose the psychological side over the mathematical. So if we extrapolate some of those things, um, I think where I'm going to sit in, and this is kind of ending the video. And with my summary is you can do a little bit of both. If you are conservative, uh, you can go all in on a certain investment and not pay off your mortgage and look at that as almost using the bank's cheap money to kind of leverage up and then make, you know, a bunch of money if you're in a However, a lot of these sentiments change when we get into a bear market, for example, and when we have stagflation or when we may even turn into Japan where the S and P 500 sits for 30 years and doesn't gain anything, it just breaks even. So I think a lot of these opinions change depending on the economy. However, um, with historically low mortgage rates, I would have to air on the side of math on this one. Um, however, you know, I just had a daughter in August, you know, you start getting that itch where it's like, yeah, you know, my taxable account is kind of high, you know, maybe I should take some of this down and, you know, um, let my runners or my winners run and pay off the mortgage, you know, with some of that account. So, um, at the end of the day, this boils down to personal preference. That's why personal finance is personal. There's no right answer. I think if you're in a situation where you can either invest or pay down your mortgage, you're in a good place, period. However, where I'm going to sit on this one is if it's your primary home, uh, and it's your forever home, you know, you're going to live there for the next, you know, 15, 20, 30 years, it may make sense to pay it off if you're ultra conservative and have a family and don't want to worry about the roof over your head. Uh, however, if these were rental properties, for example, I'm not rushing to pay off, you know, three, four, 5%, uh, debt. You know, it doesn't really make sense based on, you know, inflation based on all the money printing. Worst case scenario for debtors would be, um, a deflationary situation, um, where, you know, savers are winners and cash is King in that regard. However, that's not the case. We're seeing CPI of over 5% month over month. Uh, so this is a little bit long winded, uh, and it's more open to like an opinion editorial piece, kind of a thing that necessarily is structured as I normally do my videos, even though this was pretty structured up until now. Um, but at the end of the day, I think you can do a little bit of both. If you're somewhere in the middle, um, as always, I kind of live my lifestyle like that, the golden middle. Um, I don't really go towards, you know, yellowing my life savings and NFTs. And I don't, you know, buy bonds on the other side of that spectrum just because I don't believe in it right now, but I think somewhere in the middle is the right answer. Uh, so hopefully this video is valuable to you. Please share it with a friend. Please share it in your investing communities. Uh, get a conversation going. I really liked this kind of debate because the numbers say one thing, psychology says another. Thank you so much and have a prosperous day. That was a mouthful. So when you have a kid, it changes your perspective, man. And I know a lot of, uh, Western propaganda saying, don't have kids. Don't get married. Don't do this. Don't do that. You know, live in your van, that kind of a thing. Uh, that's not for me. So I'm just speaking from my opinion and my perspective. Um, you know, I'm doing a little bit of both paying down the mortgage and investing, uh, so that way I'm going to get a blended return. Um, and I'm still winning on both sides of the spectrum. And also I've been buying Bitcoin's basically $3,000. So, uh, buy Bitcoin. That's always the answer in my videos. Thanks guys. Let's talk to Shelly in Nashville. Shelly, how are you? Hey Dave, I'm doing good. How are you? Better than I deserve. How can I help? Hey Dave, my, uh, my mortgage is negative 17% per year. Should I pay it off early? Oh yeah. You got to pay that mortgage down. Even if the bank is paying you to take out your mortgage with negative interest rates, you got to pay that sucker down.