A Doctor’s Tale Of Living Debt Free – No Mortgage
Living Debt Free No Mortgage. Those are the five words we now live by. One of the main reasons for starting this blog was to share our debt story in hopes to inspire other docs & high income professionals to become debt free and avoid the same mistakes we’d made.
It doesn’t matter if you’re still in school, or getting ready to retire, focusing on eliminating your debt is one of the keys to a successful retirement.
There’s different schools of thought regarding personal finance when it comes to paying down debt and buying a home. Some claim that debt can be good to keep around in order to get tax deductions while others say pay it off ASAP. Here’s my thoughts on becoming free of debt (house included)…
The Millionaire Next Door
Even if you haven’t read the book, The Millionaire Next Door, you’ve probably heard it referenced a time or two. In it, we learn what a millionaire in America is like, specifically:
- How they act
- What they wear
- The cars they drive
- Their net worth
- Credit cards they carry
- Home cost
- What they value
Most that live in expensive homes and drive high end cars typically don’t have much wealth. The majority of those that live in upscale neighborhoods are strapped with debt such as credit card debt and large car payments.
Many Americans have it wrong. They think that high income = wealth.
But in reality, wealth is NOT the same as income.
Wealth = what you accumulate and NOT what you spend.
The typical millionaire pays for items only if they can afford them. They avoid debt. If they can’t pay for it, they simply delay gratification and save until they can.
If becoming a millionaire means avoiding or paying off debt, why wouldn’t you focus on this yourself?
My Debt Mistake(s)
Looking back over my career, my single biggest regret in my adult life is that I didn’t focus much on my debt load while in dental school and residency. All doctors are rich, right? At least that’s would I was led to believe. It couldn’t have been further from the truth.
Debt was a huge mistake. If I could go back, I’d do things a bit differently.
1) Work – I know it’s tough trying to work while in the pits of dental/medical school but it CAN be done. Back when I was in school, the internet was just beginning to become popular. Now, there are multiple ways students can earn money both online & offline. It’s much easier finding work on sites now instead of sorting through the classifieds like I used to.
- selling used items on ebay/Amazon
- lawn work (I did a little of this)
- pet sitting
- exercise trainer
- lab assistant
- this list could go on and on…
2) Grants/Scholarships – There are millions of dollars in grants and scholarships available each year. Many of them go unused. I admit. I didn’t think twice about applying for any of these programs, And now, with the ease of using online search, it’s faster than ever to apply.
3) Limit debt/loans – If I could go back, I would have paid much more attention to the loans (especially the interest rates) I took out. I could have reduced student loan debt by splitting living expenses (I lived alone until I got married) & moonlighting more than I did. Each year, I met with the financial counselor and always took out the max allowed. Big mistake.
My Wake Up Call
We racked up hundreds of thousands of dollars of student loan debt, bought our first home with an interest-only loan (until we could afford a down payment) and then had a solid job offer fall through shortly before gradation.
With a two month old at home, a mountain of debt & no clue how to start a practice, I immediately shifted into survival mode. The days of dreaming about the big house, over the top hunting club, and traveling the world were over. It was time to man up and get out from under the mess I’d created for myself & family.
The Road To Freedom
During my residency, I was driving to meet my buddy Brian for a round of 18 holes. While searching through the radio channels, I found Dave Ramsey. Listening to the people calling in asking for his help was eye opening. Almost every caller was struggling with something that I was currently getting in over my head with…DEBT.
I’m not sure what I’d done without his guidance. I’m the type of person that likes working with a plan and Dave’s 7 Baby Steps helped me to get out of debt much faster than trying it on my own.
My friends over at Well Kept Wallet have a nice visual of Dave’s Steps:
Baby Step Modifications
I admit that I didn’t follow Dave’s Baby Steps to the “T”.
Here are a few of my modifications:
1. Emergency fund
Dave recommended saving only $1000 then begin step #2 “the debt snowball”. Remember, I had taken out an interest-only mortgage so my goal was to build up enough $$ to take out a traditional mortgage. All extra money during the first 18 months of work was put into our emergency fund (which included the 20% home down payment). I saved up about three months of expenses first, then the remainder went to the down payment.
Dave recommends that investing 15% of the gross income starts once all debts are paid off minus the house. Again, a modification was made. I felt that I was diligent enough to save while paying down debt. This also included starting 529 plan for both boys as soon as they entered this world.
What about becoming mortgage free?
Paying Off The Mortgage Early
In Baby Step #6, Dave recommends paying off the mortgage early. There are two schools of thoughts on this. Let’s take a look at what Suze Orman has to say about this.
Suze Orman is all for us paying off our mortgage early. Especially baby boomers. She states that more than one in three homeowners 65 or older is still paying off a mortgage. The median amount owed is excess of $80,000.
I don’t know about you, but I don’t want that kind of mortgage debt looming over my head while nearing retirement.
Suze believes in investing in the known. If someone wants to stay in their home while nearing retirement, paying off the home loan is a great way to build security. This helps to protect from the unknowns that many of us could face:
- being forced to leave your job sooner than you expected
- the possibility that tax rates will rise which reduces retirement savings
- potential poor investment returns while in retirement
Do you remember the financial meltdown in 2008? What if something like this happens as you near retirement? This is yet another reason she wants us to be mortgage free as soon as possible.
Other School Of Thought
“Debt is dumb, cash is king and the paid-off home mortgage has taken the place of the BMW as the status symbol of choice.” – Dave Ramsey
For me, paying off our home early was more psychological than anything else. There is another school of thought about this that believes it could cause harm to your overall portfolio.
They claim that harm comes from the extra money you put toward your mortgage. Deciding to put money toward the principal balance of your mortgage means you are not investing that extra money.
Top reasons why some recommend not paying off the mortgage early
Reason #1: Your mortgage doesn’t affect your home’s value.
Most purchase a home because they think it will rise in value over time. Yet, the eventual rise (or fall) in value will occur whether a mortgage is held or not. This is one of the main reasons this group recommends getting a mortgage: The house’s value will be unaffected.
They claim that owning your home outright is like having money buried under a mattress. Since the house will grow (or fall) in value with or without a mortgage, any equity in the house is, essentially, earning no interest.
They ask, “You wouldn’t stuff ten grand under your mattress, so why stash $400,000 in the walls of the house?”
Having a long-term mortgage lets your equity grow while your home’s value grows.
Reasons #2 and #3: Mortgage interest is tax-deductible. And mortgage interest is tax-favorable.
Mortgage Interest Deductibility in 2018
- Interest payments are deductible on mortgage debt of up to $750,000—formerly $1,000,000
- Married couples filing separately can deduct interest on up to $350,000 each—formerly $500,000
- Up to 2025, these new limits won’t apply to mortgages originated before December 15, 2017
- Deduction for other home equity debt (HELOCs and second mortgages) eliminated—formerly $100,000
This school also focuses on keeping a mortgage around to get tax breaks.
The interest you pay on loans to buy a qualified residence (up to $750,000) is tax-deductible if you itemize your deductions. The deduction is taken at your top tax bracket.
Thus, if you’re in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. You save on state income taxes too.
If you’re in the 32% tax bracket and you get a 5% mortgage. That loan costs you 3.40% after taxes. Meanwhile, if you invest money and earn 5%. Your profits are taxed at only 15%, meaning your after-tax profit is 4.25%.
Thus, even if your investments earn no more than what you pay for your loan, you’re still making a profit.
Reasons #3 and #4: Mortgages allow you to invest more money and to invest it more quickly. Mortgages allow you to create more wealth than you otherwise would.
Again, this school is playing the numbers game.
Here’s another scenario they are giving us to drive their point home of keeping mortgage payments around:
Let’s say you net $300,000 from the sale of your old house, and you’re ready to buy a new home for $300,000.
Should you use all your cash and make a $300,000 down payment?
Or should you place only $60,000 down, which is 20% of the purchase price?
If you use all of the $300,000 to buy your new home, your monthly mortgage payment would be zero. ( I like that!)
If you make the smaller down payment of $60,000, your monthly mortgage would be $1,146, assuming a 4% 30-year mortgage.
- Why so many people prefer to make big down payments when they buy houses.
- A big down payment translates to a small monthly payment (our example it would equal $0.)
Warning: They also think that the people who are asking us to choose between big monthly payments and small monthly payments are lying.
They feel that the correct question is not about the amount of money you want to pay monthly, but the amount you want to invest.
They’re MORE focused on wealth creation, not debt elimination… so they claim.
Here’s the question they tell us that we should be answering instead:
Would you rather invest:
- $240,000 right now, as a one-time-only deposit or
- $1,146 a month, every month, for the next 30 years?
They feel that regardless of the time period, investing a large amount now produces better results than investing small amounts over long periods.
Thus, while a low mortgage payment lowers your overall expenses, it also lowers your overall wealth.
And last but not least, here is their final reason for holding on tight to our mortgages…
Reason #5: You’ll never get rid of your monthly payment, no matter how hard you try.
They preach that even if we pay off our homes, we still won’t completely eliminate all our payments.
We’ll still have to pay:
- property taxes
- homeowner’s insurance
Because of this, they claim, our goal of “getting rid of the mortgage payment” is impossible. Even if you eliminate the mortgage, you’ll still have all of these other payments.
What about vehicles?
Should we NEVER pay off our car loan because we’ll have to continue paying for insurance, maintenance and gas too?
As you can see, I don’t agree with any of their reasons for holding on to a mortgage.
I realize that they are focusing on mathematical reasoning only, but let me tell you why I paid off our mortgage early…
Why We Opted For Paying Off The Mortgage Early
The “don’t pay off your mortgage folks” are looking at this strictly from a numbers stand point. Again, for me, it’s more psychological. There’s something about pulling in your driveway of a paid for home everyday. It’s just has a different feel to it.
Plan to retire early
We were at our friend’s house watching my LSU Tigers play when a urologist asked me if I would be interested in purchasing a lot that he had for sale. Before I could answer, his brother-in-law/endodontist informed him that building a new office was NOT part of my exit strategy.
The urologist began peppering with me questions:
- What do you mean, exit strategy?
- How long have you been practicing?
- When do you plan on retiring?
- What? You’re going to retire in your 50’s?
- How is that possible?
For us, carrying around a mortgage would not allow us to happily retire early in our 50’s. If you plan on working the rest of your life, go ahead and keep your mortgage around. If not, pay it off ASAP.
Invest more while keeping expenses low
Part of our early retirement plan involves investing heavily for the future, but the rest requires us to keep our expenses as low as they can go now. Mortgage payments are one of the largest monthly expenses most people have.
It will be a lot easier for us to retire without a mortgage – especially if we spend the next decade or so saving the money we would’ve spent on a monthly mortgage.
Lower stress + financial freedom
The older I get, the less stress I want. During this year’s FinCon meeting in Orlando (conference for financial bloggers), several of us traveled to the Magic Kingdom. Walking around, I couldn’t help reminiscing when we used to take our boys there when they were younger.
I used to love seeing their excitement and joy running to meet Mickey and friends.
My how my perception has changed while visiting without kids!
I certainly didn’t envy those parents that were struggling with trying to keep upset, hot, exhausted kids entertained.
Again, the older I get, the less stress I want.
Without a mortgage payment, one of our main monthly financial obligations suddenly becomes a thing of the past. I realize that we have to continue paying for taxes, insurance and upkeep, but you still are responsible for it with a mortgage too.
With fewer bills comes less stress. Instead of worrying over money, we can relish our time that we have left with our kids still under our roof. This involves traveling with them and spending our time doing whatever we want.
In my mind, being entirely debt-free is the ultimate luxury. Traveling down the road to financial freedom has taught me many things such as:
Use self-control: Make a plan & stick to it
Set goals: Debt-free living is a goal, so people who want to accomplish it keep that objective in front of them.
Contentment: I’ve come to realize that money doesn’t buy happiness. We have become content with what we have and aren’t seeking out more junk to buy our happiness.
In my opinion, becoming debt-free including the house is the way to go. Hope you decide to join me….
Do you have a debt-free story you’d like to share?
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