78% of Americans live paycheck to paycheck

[TwoCitiesCapital]

1 hour ago, thepupil said:

 

I agree with this, but would point out that the value of that bond is much higher than $250K. Because I'm a complete nerd about this, I have a spreadsheet that automatically imports the yield curve and discounts each future mortgage P&I payment at the relevant zero coupon rate.

 

My mortgage has 316 months left on it, has a 2.875% rate, and is worth about

 

83% of par using the treasury curve

75% at tsy curve + 100

68% at +200

63% at +300

50% at +600

38% at +1000. 

 

The weighted average life of the principal payments on my mortgage is 177 months, so while it was a 30 year mortgage in  its now a 26.33 mortgage and the principal payments are on average just 15 years away so rates have not made 30 year mortgages worth 50 cents on the dollar. More like 80%.

 

So the way i see it is that a risk averse person with my mortgage should just buy bonds (I buy about $5K / month in my 401k) as a way to slowly defease the low cost mortgage. An enterprising investor should buy riskier assets do do so.

 

There's a tax angle as well. Assuming full taxability of the treasury interest, at the maximum federal rate, the return on treasuries is actually treasuries MINUS 1.5%. At that discount rate, my mortgage is worth a full 97% on the dollar (assuming no mortgage interest deduction). It's here where the argument for simplicity and just paying off the mortgage is strongest. If the choice is between treasuries in a taxable account and paying off mortgage where taking the standard deduction and there's zero tolerance for market risk,and no value placed on liquidity flexibility, then just pay off the mortgage. 

 

I value flexibility, liquidity, think i'll make more than treasuries (but am buying those in a tax advantaged account) and don't envision paying off the mortgage until i move or 2050

 

+1

 

Sounds like your specific example is very similar to mine. Agree that mortgages have not fallen 50%. The monthly principal payments make them less duration sensitive than a similar maturity bond - they just happened to be MORE duration sensitive than the 10-year everyone benchmarked them to as prepayments go down and mortgage spreads widened. 

 

I am reducing other debts, even where it doesn't maximize the full financial value I could receive from the leverage, but the mortgage is a harder equation for me for me to decide on. 

 

Edited May 22 by TwoCitiesCapital

[Castanza]

37 minutes ago, Spooky said:

I don't have a mortgage and am currently debt free. The flexibility / psychological benefits are underrated in my opinion but that just could be me. Many people around me in Canada are over leveraged and the rise in interest rates is causing significant stress among a number of friends. Meanwhile I feel a sense of zen / calm just saving each month, watching my wealth compound. I have a healthy dose of cash which is earning interest. My rent is capped and if something goes wrong I just need to give my landlord 60 days notice and I'm out of here. I am also not tied to any specific location so if I wanted to pick up and become a nomad it is pretty easy.

 

Thought this article on debt by Morgan Housel was interesting: https://collabfund.com/blog/how-i-think-about-debt/

 

 

 

 

 

Yup, Morgan is a good resource on this. People simply can't comprehend it, because we live in a hustle culture/keep up culture. They focus on 65+ and how much they will have then, instead of how much time/money they have now. 

 

I think a balance needs to be made. I live debt free, and also invest, work full time, have side hustles etc. But I spend as little time as possible thinking about money and how to eek out an extra 50 basis points on a lump sum of cash. YOu can go too far with that shit imo. Not good for the mind and body imo. 

 

The flexibility of never having to worry about your job, market downturns, or making payments etc. is priceless. A lot of people out there break their back because of their cashflow situations. Also a lot of people overleverage themselves and live that lifestyle and still aren't saving enough for retirement. To me it's cleaner this way and easier to predict/project into the future. There is something to be said about lack of complexity as well. If I die, my wife is not going to want to deal with all this financial engineering. And the cost of paying someone else to figure it all out with lawyer fees, financial advisors, etc. is not insignificant. 

 

To each there own, there isn't a right or wrong way. But I think a lot of people "do" things because that's what the "experts" say. No different than "everyone needs to go to college." Well look how that's turning out for a lot of people. I don't have to bust my balls working 60+ hours a week hoping the boss throws me a bone and gives me that promotion, pay raise or bonus. I don't have to put on the networking face and live that LinkedIn life where you're constantly competing against your peers and the new tech/stack blah blah bah. If you enjoy that go for it!

 

Let me be clear too. I lived pretty much debt free before I decided to go ahead and pay off the mortgage. I did prioritize investing, saving, and education. I worked full time, paid cash for school and paid off existing student loans etc. It's not like I skipped the step of saving, investing for retirement, and investing in myself. It was 10 years later when we figured "hey we are here financially, this is next for us, will paying this off improve this situation and allow us to enjoy this chapter of life more?" The answer was YES then and has been YES since then. So context does matter. 

 

I just see a lot of peers my age and younger with a huge mortgage, expensive cars, mountains of student loan debt, financed furniture, expensive phones, expensive vacations, expensive and financed everything.....always worried about their jobs, always complaining about the hours they have to work, where they work and how they don't have time with their kids etc. When you talk to these people though, their opinion is always "invest and finance because you earn more in the market." Well not many of them are maxing their 401k, ROTH IRA, HSA, Savings bonds, etc. They now feel like they need to earn more and work more to reach that goal. 

 

To quote Dealraker..."Life is great if you can stand it!" 

 

Seems like there are a lot of people who CANT stand it! 

 

The title of the thread! 78%! Something ain't working....and I don't think the problem is people having too little debt to pay!

 

Edited May 22 by Castanza

[Gregmal]

Companies can healthily take on debt at 20-30% net debt to EV. They can go 4x EBITDA. People can do the same if the know what theyre doing. Similarly having net asset value/cash while carrying a mortgage is pretty much the same as not having one except you have the benefit of liquidity and optionality. Mainly I think its psychological. 

[Ross812]

2 hours ago, thepupil said:

 

I agree with this, but would point out that the value of that bond is much higher than $250K. Because I'm a complete nerd about this, I have a spreadsheet that automatically imports the yield curve and discounts each future mortgage P&I payment at the relevant zero coupon rate.

 

My mortgage has 316 months left on it, has a 2.875% rate, and is worth about

 

83% of par using the treasury curve

75% at tsy curve + 100

68% at +200

63% at +300

50% at +600

38% at +1000. 

 

The weighted average life of the principal payments on my mortgage is 177 months, so while it was a 30 year mortgage in  its now a 26.33 mortgage and the principal payments are on average just 15 years away so rates have not made 30 year mortgages worth 50 cents on the dollar. More like 80%.

 

So the way i see it is that a risk averse person with my mortgage should just buy bonds (I buy about $5K / month in my 401k) as a way to slowly defease the low cost mortgage. An enterprising investor should buy riskier assets do do so.

 

There's a tax angle as well. Assuming full taxability of the treasury interest, at the maximum federal rate, the return on treasuries is actually treasuries MINUS 1.5%. At that discount rate, my mortgage is worth a full 97% on the dollar (assuming no mortgage interest deduction). It's here where the argument for simplicity and just paying off the mortgage is strongest. If the choice is between treasuries in a taxable account and paying off mortgage where taking the standard deduction and there's zero tolerance for market risk,and no value placed on liquidity flexibility, then just pay off the mortgage. 

 

I value flexibility, liquidity, think i'll make more than treasuries (but am buying those in a tax advantaged account) and don't envision paying off the mortgage until i move or 2050

 

I will admit I was just spit balling on the present value of your mortgage earlier. Can't you just use the Annuity Payout Formula to find the present value of your loan given your rate of return?

 

Example:

500k - 30yr mortgage @ 3% - monthly payment is $2108 

w = $2018

r = let's use 6%

k = 12 months

t = 30 years

 

P = $336,585

 

So you can put $337k in an account earning 6% and pay the loan off over 30 years. I hear the "but taxes" argument, but @Castanza and @TwoCitiesCapital are saying the mortgage is tying them to working so hard. If there was no mortgage, you could take a pay cut so the taxes argument really doesn't apply here because they are making the argument to take a lower stress job and scale back the W2 income so the annuity just becomes supplemental income and is likely taxed at a lesser rate than your wages. 

 

 

 

 

[villainx]

3 minutes ago, Gregmal said:

Mainly I think its psychological. 

 

If you are position to be mortgage debt free, that's completely different position.  Not to support the pay check to pay check group, even without extravagant spending but having a home and squirreling away retirement savings and building reserves for frugal living is pretty overwhelming until one gets better job security and maturity.

[thepupil]

46 minutes ago, Ross812 said:

 

I will admit I was just spit balling on the present value of your mortgage earlier. Can't you just use the Annuity Payout Formula to find the present value of your loan given your rate of return?

 

Example:

500k - 30yr mortgage @ 3% - monthly payment is $2108 

w = $2018

r = let's use 6%

k = 12 months

t = 30 years

 

P = $336,585

 

So you can put $337k in an account earning 6% and pay the loan off over 30 years. I hear the "but taxes" argument, but @Castanza and @TwoCitiesCapital are saying the mortgage is tying them to working so hard. If there was no mortgage, you could take a pay cut so the taxes argument really doesn't apply here because they are making the argument to take a lower stress job and scale back the W2 income so the annuity just becomes supplemental income and is likely taxed at a lesser rate than your wages. 

 

 

 

 

 

a couple of quibbles. 

 

- in spitball you changed $250K / $500K (50% of par) to $337K / $500K = 67% of par, so i agree with the direction

 

- A 30 year mortgage at 3% does not exist today. There are plenty of 23-26 year mortgages at 3% but no 30 year mortgages.  Using the treasury curve, a 26 year 3% mortgage (which exists) is worth 85% of par. a 30 year 30% mortgage (which does not exist) is worth 78%

 

- Your discount rate of 6% is about 130 bps higher than treasuries. a 26 year using tsy curve + 130 bps is worth 74% of par. a 30 year using tsy 130 bps is worth 69% of par (in line with your calculation...close to your 67%). 

 

By using a term that's 4 years longer (low rate mortgages were originated 3+ years ago) and a discount rate that's about 130 bps higher than the treasury curve, you are coming up w/ a discount that's significantly higher. 15% (85% of par) to 31% (69% of par). 

 

we can all make various assumptions and come up with a range of values, low mortgages definitely have value to the borrower...it's just not quite as high as people think. 

to be clear, there’s nothing wrong with using a 6% discount rate, just explaining reasons for different view on what the PV is. 

 

Edited May 22 by thepupil

[Castanza]

As I said different strokes for different folks. I'm a bird in the hand is worth two in the bush kind of guy. But as Greg said it is mostly psychological. However that works both ways. Because there are a lot of people on here scoffing at the idea of paying off your mortgage early because you could be better returns elsewhere....But then some of those same people are out here leasing expensive vehicles or dropping 1k a month at fancy restaurants or 30k a year on vacations. Everyone has areas where they could be more efficient with their money. I look at it as a way of handicapping myself and my unknown future financial situation. More is not always better imo.

 

I think a lot of people are conditioned to think 2010-2020 of zirp, 3% mortgages and ~13% market returns are the norm. Did people have the mindset of invest over save prior to the 2000's? This is before my investing career. 

 

Maybe I'll change my screen name to Spicoli: 

 

[Ross812]

10 minutes ago, thepupil said:

 

a couple of quibbles. 

 

- in spitball you changed $250K / $500K (50% of par) to $337K / $500K = 67% of par, so i agree with the direction

 

- A 30 year mortgage at 3% does not exist today. There are plenty of 23-26 year mortgages at 3% but no 30 year mortgages.  Using the treasury curve, a 26 year 3% mortgage (which exists) is worth 85% of par. a 30 year 30% mortgage (which does not exist) is worth 78%

 

- Your discount rate of 6% is about 130 bps higher than treasuries. a 26 year using tsy curve + 130 bps is worth 74% of par. a 30 year using tsy 130 bps is worth 69% of par (in line with your calculation...close to your 67%). 

 

By using a term that's 4 years longer (low rate mortgages were originated 3+ years ago) and a discount rate that's about 130 bps higher than the treasury curve, you are coming up w/ a discount that's significantly higher. 15% (85% of par) to 31% (69% of par). 

 

we can all make various assumptions and come up with a range of values, low mortgages definitely have value to the borrower...it's just not quite as high as people think. 

 

 

 

I'm just trying to throw out some numbers and apply some arithmetic rather than relying on what feels good. And agreed, I'm coming up with a present value of $363k on a 500k loan @ 3% originated 4 years ago with 26 years left and 456k of remaining principle for ~80% of par @ a ROR of 4.7%. I think we are both saying roughly the same thing. The difference in prepaying $456k or sticking $363k in treasuries and treating it as an annuity is 4 years worth of maxing out a 401k which isn't nothing. These are all rich people semantic arguments we are having when the topic is 78% of Americans living paycheck to paycheck.    

[thepupil]

41 minutes ago, Ross812 said:

 

I'm just trying to throw out some numbers and apply some arithmetic rather than relying on what feels good. And agreed, I'm coming up with a present value of $363k on a 500k loan @ 3% originated 4 years ago with 26 years left and 456k of remaining principle for ~80% of par @ a ROR of 4.7%. I think we are both saying roughly the same thing. The difference in prepaying $456k or sticking $363k in treasuries and treating it as an annuity is 4 years worth of maxing out a 401k which isn't nothing. These are all rich people semantic arguments we are having when the topic is 78% of Americans living paycheck to paycheck.    

 

agreed! 

 

I've said this before, but I think the degree to which people bought at low rates really creates an impressive amount of transaction cost for selling one's home. Let's settle on a low rate mortgage being worth 80% of par.

 

If you move (and prepay) you are buying back a mortgage worth 80% at 100%, so you're losing 20% of par. At 40-70% LTV, that's 8-14% of asset value. Tack on the usual realtor fees and shit of 8% and you're talking about 16-24% of ASSET value in transaction costs of moving and even bigger % of your equity. 

 

I think if I moved sold my house, I'd instantly be worth $300K less. 

 

in other words, my liquidation value is much less than my Gross NAV. 

 

 

Edited May 22 by thepupil

[Gregmal]

Well yes, a mortgage imo can be both an asset and a liability. 
 

I also think it can double as an efficient savings vehicle. If you are 25 and dumb and say inherited $300k I’d say go buy a collection of $2m worth of property with 30 year fixed rate mortgage. Rent it out. Your retirement at 55 is secured.

[gfp]

8 minutes ago, Gregmal said:

Well yes, a mortgage imo can be both an asset and a liability. 
 

I also think it can double as an efficient savings vehicle. If you are 25 and dumb and say inherited $300k I’d say go buy a collection of $2m worth of property with 30 year fixed rate mortgage. Rent it out. Your retirement at 55 is secured.

 

Exactly.  Sounds almost verbatim from one of my 'driving the kid to high school' morning lectures from years past.  Even a group of dumb high school kids could grasp this simple concept despite having no idea what an amortization table or anything like that was.

[DooDiligence]

1 hour ago, Castanza said:

As I said different strokes for different folks. I'm a bird in the hand is worth two in the bush kind of guy. But as Greg said it is mostly psychological. However that works both ways. Because there are a lot of people on here scoffing at the idea of paying off your mortgage early because you could be better returns elsewhere....But then some of those same people are out here leasing expensive vehicles or dropping 1k a month at fancy restaurants or 30k a year on vacations. Everyone has areas where they could be more efficient with their money. I look at it as a way of handicapping myself and my unknown future financial situation. More is not always better imo.

 

I think a lot of people are conditioned to think 2010-2020 of zirp, 3% mortgages and ~13% market returns are the norm. Did people have the mindset of invest over save prior to the 2000's? This is before my investing career. 

 

Maybe I'll change my screen name to Spicoli: 

 

 

I've been debt free for about 8 years (just checked, make that 10 years) now and the peace of mind has been well worth the opportunity cost.

 

That said, I've been thinking about selling my home and moving in town (closer to the action). I'd probably put 50% down in a yuppy-ish Pensacola neighborhood (East Hill), and put the leverage to work. My musically inclined, Libtard buddies all live in and around this area.

 

In other news, early this year, I sold a HB 1st/1st of FTaRH (with an unclipped DJ) for $600 on Feebay.

I had recently re-watched the movie and re-read the book and found it to be more tragic than funny.

The movie is still funny, but damn, Stacey just wanted to be loved. Bought an Arturia Minifreak with the proceeds.

Edited May 22 by DooDiligence

[Paarslaars]

How does being debt free bring piece of mind? I never even think about my mortgage... Would be stressing over the opportunity cost if I didn't have one.

[DooDiligence]

18 minutes ago, Paarslaars said:

How does being debt free bring piece of mind? I never even think about my mortgage... Would be stressing over the opportunity cost if I didn't have one.

 

I quit the oilfield in 2000 and started a business that I was completely unsuited for (wholesale jewelry). Went from having a nice nest egg to a shitload of debt (40% mortgage and the rest unsecured). Went back offshore and started paying people back. Didn't negotiate any of the debt down, just paid it off. Built a house and paid it off within a year. I was so overwhelmed that I did not want to owe anyone monetarily. My views have softened a bit and I wouldn't be so reluctant now. Psychology, go figure.

 

https://www.investmenttalk.co/p/a-masterclass-with-bill-miller?r=6gq23&utm_medium=ios&triedRedirect=true

 

If I sell my home and get what I want, it will have produced a decent investment return over a 22 year holding period, with most of the capital employed in the property over the past decade. I could have gotten significantly higher returns in equities. But, how do you put a value on enjoyment and peace of mind? I don't feel the need to try and wring every nickel out of my life's work. You guys are not wrong either.

Edited May 22 by DooDiligence

[thepupil]

12 minutes ago, Paarslaars said:

How does being debt free bring piece of mind? I never even think about my mortgage... Would be stressing over the opportunity cost if I didn't have one.

 

 

I'm in this camp as well. being mortgage free would stress me the fuck out. I'm simply not rich enough to forego the $xxxK of liquidity afforded to me by my mortgage. maybe if i had assets in excess of say 10x my mortgage, I'd pay it off. even if the rate were high ish (say 6-7%), I wouldn't want to give up the liqudiity/flexibility/diversity of having a mortgage offset by a bunch of different kind of assets. 

 

I've gotten to point where cars are low single digit % of NW...I don't bother financing those even when cheap, so I understand at a point, it becomes a "who cares about optimizing" but need like $6,8,$10mm to just casually pay off my mortgage to have one fewer bill. 

Edited May 22 by thepupil

[Gregmal]

The biggest benefit of the mortgage is it allows the common man access to an asset they’d almost never otherwise be able to afford. If the housing market was all cash, or short term loans, first time homebuyers would have to be in their 40-50s. Even with housing prices drastically lower, how many people can come up with $200-300k cash before 40?
 

In and of itself, that is peace of mind. 30 year, fixed. Equity grows, debt declines. In the instance of the 25 year old with an inheritance, who cares if occasionally the rent doesn’t cover the mortgage. You have one job, and that’s it. Make sure the mortgages get paid every month for 30 years. You don’t need to think about exact IRR or capital allocation. You don’t need to worry about appreciation. You just get the dang bill paid and assuming 0 appreciation over 30 years which is virtually unheard of in the US, you have a $2m nest egg 10 years before everyone else is retiring. 

[flesh]

Not that it's relevant, or is it? Buy a house with a mother in law, complete amenities, separate parking/entrance and rent it. My renter pays 80% of my mortgage, which is at 2.8%. In 20 years it will be paid off and the renter at the inflated prices 20 years hence will pay for 1/3- of my retirement. You don't worry or at least it seems a stretch to worry, when your renter will cover your mortgage in 5-10 years. Where I'm at 1/10 houses come with such mother in laws. No brainer. If you earn 10% a year on the 2.8% debt, your house is not only free, it pays you. Just break the rules, it's easier. 

 

The price of a single family w mother in law is the same as a single family as opposed to a duplex. Continuing this simple idea, I can rent my current house as two units, which will bring in 2x the mortgage. Using that extra cash flow allows me to buy a bigger better house that also has a mother in law for free when accounting for the basic math. So that's what I'm doing now. Well, as soon as rates come back down that is. With a 7% mortgage that changes the calculation to just a good deal but not free which isn't tolerable. 

[SharperDingaan]

The mortgage thing comes down to risk tolerance, and degree of interest. Of course there are lots of financial alternatives, but most of us would prefer to spend the bulk of our attention/energy on other than just 'finance'. The reality is that the tail doesn't wag the dog, and the older you get the less risk tolerant (the simpler the better) you become.

 

It is also about how you propose to maintain your long-term mental health. Overworking to make the payments on over indebtedness (dying from stress), is as bad as underworking because you no longer have to (dying from boredom). Most people regard working a reasonable number of hours at something they like as healthy; and if the money isn't needed - it could make mortgage payments.

 

It's essentially a state of mind; perhaps best expressed in the famous quote from The Apprenticeship of Duddy Kravitz (Mordecai Richler), "a man without land is nobody" - substitute a mortgage free house for land. The Apprenticeship of Duddy Kravitz (film) - Wikipedia

 

SD

 

 

 

 

 

   

 

 

Edited May 23 by SharperDingaan

[Parsad]

2 hours ago, Paarslaars said:

How does being debt free bring piece of mind? I never even think about my mortgage... Would be stressing over the opportunity cost if I didn't have one.

 

You guys are probably in the minority.  The majority of people, especially near retirement, would probably be very pleased that they have no mortgage payment to make each month. 

 

Being debt free, money in the bank, income coming from passive investments...that's a life where you can tell the banks, bosses, lenders and everyone else to just fuck off!  Cheers!

[james22]

I pretend I paid cash for my condo because [good reasons], but really because I was too lazy to go through the application process.

[Castanza]

15 minutes ago, Parsad said:

Being debt free, money in the bank, income coming from passive investments...that's a life where you can tell the banks, bosses, lenders and everyone else to just fuck off!  Cheers!

 

LOL it's funny this even has to be said! 

[John Hjorth]

31 minutes ago, Parsad said:

... Being debt free, money in the bank, income coming from passive investments...that's a life where you can tell the banks, bosses, lenders and everyone else to just fuck off!  Cheers!

 

So true, Sanjeev [ @Parsad] !

 

If one hasen't tried and experienced it, I think it is actually to a certain degree hard to really explain. I would say, that it in a way is a trigger for an internal change ['revision' is perhaps a better word here?] of own personality, may read solemnly and self-celebrating to some.

 

35 minutes ago, james22 said:

I pretend I paid cash for my condo because [good reasons], but really because I was too lazy to go through the application process.

 

Great example of having F***U* money, James [ @james22] ,

 

It felt good, right

[Parsad]

32 minutes ago, Castanza said:

 

LOL it's funny this even has to be said! 

 

I've been on the broke side and I'm fortunate enough to be on the very comfortable side.  I can tell you for a fact that there were things I had to do when I was broke that were tough, painful and demeaning to my ego and self-worth.  But when you need to make a buck, you work and take shit to make a buck.  

 

Now, on the other side, if anyone says money doesn't make you happy...you're right.  But it sure lets you sleep more comfortably at night with a lot of stresses out of the way, and the fact you are no longer beholden to a paycheck or some asshole who pays your paycheck.

 

I've never wanted to be rich or famous...just free!  Like Spicolli, all I wanted was to just catch that perfect wave, have a beer and a slice of pie!  Five-star hotels when I travel are also great!

 

Cheers!

[DooDiligence]

You're both right. That's a good place to be.

[John Hjorth]

8 minutes ago, RedLion said:

I have a paid off home and a couple paid off rental properties, and I am itching to pull cash out to invest opportunistically. 
 

My wife had agreed to eventually do a cash out refi on our primary, and I can tell she doesn’t want to. I suspect it’s a psychological thing. I would feel code comfortable with $750k of additional liquidity in t bills and dividend stocks and a $750k mortgage. My wife feels more comfortable with a paid for home. 

 

Thanks for sharing, @RedLion,

 

Is not only a matter of perspective and some other more or less rational considerations. It's a matter of the answer to the question :

 

Where is the best place to install the waterproof shutters in 'the ship'?

 

'The ship' here understood as your or your familys total economic sphere. The only question that really matters, when the ship may be in frothy waters, and that in end separates the sheep from the goats when it really matters.

 

I have come the conclusion that the RE leverage - alone for this reason - always, - if possible - should be in the investment sphere, if non recourse possible [as in listed in general].

 

Personally, I've been thinking quite a bit about related to investments European listed real estate, where I have started slowly - very slowly - to dip toes.

 

The separation criteria has so far actually to a great part been related to the initial assessment of intelligent, and thereby sustainable financing for the long term, or not.

 

It is about staying power, too.