78% of Americans live paycheck to paycheck

[james22]

1 hour ago, blakehampton said:

The thing that I don't understand is how an "urge" gets passed on. I can wrap my head around health and looks, but feelings toward certain actions seems odd to me. I'm not disagreeing, I'm just curious.

 

We're hardwired for any number of things, status (by display) the most relevant to this discussion:

 

https://hbr.org/1998/07/how-hardwired-is-human-behavior

 

 

[LC]

52 minutes ago, TwoCitiesCapital said:

I'm torn on this. Because I have a mortgage @ 2.75% and know financially it's the very last thing I want to put marginal $ towards. 

 

But I also hate my job and would love to quit and just take some time, and the mortgage is basically the only impediment to quitting and/or taking a lower paying, but more satisfying, job. 

 

 

Assume you have the cash to pay off the note, why not instead buy a 30 year treasury, use the coupons to pay the mortgage? Plus you still have some spread for taxes or profit?

[Jaygo]

3 hours ago, james22 said:

 

How could it not be?

 

Only those adaptations that aided our ancestor's survival and reproduction were passed on.

 

(A preference for immediate rewards over those uncertain is the least of our environmental mismatches today.)

Our instinctual goal in life is to stay alive long enough to reproduce and ensure their survival until fit. 
 

The instinct of spending money and gorging on things is actually pretty simple when it may cause you to be sexually attractive and reproduce. Who gets laid more, the guy with 10 mil in his account or the guy who acts like he has 10 mil. 
 

Don’t fret rational cobf’ers I think smarts and rationality can be attractive to the opposite sex as well, just not in your 20’s lol. 
 

 

 

[Jaygo]

10 minutes ago, LC said:

 

Assume you have the cash to pay off the note, why not instead buy a 30 year treasury, use the coupons to pay the mortgage? Plus you still have some spread for taxes or profit?

I’m pretty sure that after taxes it equals out no?  I think the idea that SD brings is that you are gaining a level of freedom and flexibility that has a value as well. The numbers are harder to pin down. 

 

yeah I may do 8-12% a year but after tax that may just be about the same as paying off a 6 % mortgage. 
 

 

 

 

 

[james22]

2 hours ago, RichardGibbons said:

FWIW, this is a misunderstanding of evolution. Lots of stuff gets passed on that didn't aid our ancestor's survival and reproduction. All something needs to be passed on is to not be catastrophic before reproduction.

 

You're thinking evolutionary biology (the mechanism), where not only the fittest (or most adaptive) survive.

 

Evolutionary psychology works backwards, identifying the drivers of behavior today by their value in the past. Dismisses anything else passed on that didn't aid our ancestor's survival and reproduction.

[james22]

23 minutes ago, Jaygo said:

Who gets laid more, the guy with 10 mil in his account or the guy who acts like he has 10 mil. 

 

Ha. Stealth wealth discussions among married finance forum commenters always overlook this.

[Gregmal]

1 hour ago, TwoCitiesCapital said:

 

+1 

 

I'm torn on this. Because I have a mortgage @ 2.75% and know financially it's the very last thing I want to put marginal $ towards. 

 

But I also hate my job and would love to quit and just take some time, and the mortgage is basically the only impediment to quitting and/or taking a lower paying, but more satisfying, job. 

 

Freedom and flexibility is hard to put a price on. But it's worth something. 

 

 

Same as anything is born with instinct - just like babies instinctively root and mouth for a nipple when they're hungry. 

In this scenario, couldn’t you arb it? Like rent your primary with the super low mortgage, net money on the rent, and then instead of buying fixed income pay cash or heavy cash allocation towards a second place?

[LC]

3 minutes ago, Gregmal said:

In this scenario, couldn’t you arb it? Like rent your primary with the super low mortgage, net money on the rent, and then instead of buying fixed income pay cash or heavy cash allocation towards a second place?

That's what I'm doing here. Renting the 2.75% place and buying a fixer-upper (bored - need a project). 

[LC]

26 minutes ago, Jaygo said:

I’m pretty sure that after taxes it equals out no?  

Well, keeping the mortgage means you keep the interest tax deduction. 

 

I think the benefit is: 

1- you end up slightly ahead on the spread

2- you get a lot more flexibility, i think, because treasuries are way more liquid.

[Jaygo]

1 minute ago, LC said:

Well, keeping the mortgage means you keep the interest tax deduction. 

 

I think the benefit is: 

1- you end up slightly ahead on the spread

2- you get a lot more flexibility, i think, because treasuries are way more liquid.

I forgot you may have a deduction on mortgage interest. In Canada we do not. 

[TwoCitiesCapital]

1 hour ago, LC said:

 

Assume you have the cash to pay off the note, why not instead buy a 30 year treasury, use the coupons to pay the mortgage? Plus you still have some spread for taxes or profit?

 

It doesn't work like that. Because your monthly mortgage payment amortized differently and requires principal AND interest. 

 

It actually requires quite a bit more than the principal in treasuries to cover the monthly payment. Something to the tune of ~60% greater than the balance of my mortgage in treasuries where the 6-month coupon would cover 6 months of payments - Treasury balance can decrease with time/principal reduction.

 

And then the HOA fees? Total would be more than double the mortgage balance to be covered in FCF from treasuries. 

Edited May 22 by TwoCitiesCapital

[TwoCitiesCapital]

15 minutes ago, Gregmal said:

In this scenario, couldn’t you arb it? Like rent your primary with the super low mortgage, net money on the rent, and then instead of buying fixed income pay cash or heavy cash allocation towards a second place?

 

I've rented the guest room on and off over the last 6-years. But my location doesn't really have the demand for me to be able to cover the note/HOA in consistent rent unless if I'm looking for high turnover tenants like travel nurses - which is work and risk unto itself. 

 

Love the condo - but do long for the flexibility. 

Edited May 22 by TwoCitiesCapital

[LC]

7 minutes ago, Jaygo said:

I forgot you may have a deduction on mortgage interest. In Canada we do not. 

Keeping the mortgage in Canada allows you to deduct the interest- SD mentioned it earlier “smith maneuver”

[Jaygo]

The smith maneuver is when you borrow the equity in your home and invest. The interest on that dept will then be tax deductible. The remaining mortgage interest will remain Un deductible. 

[Ross812]

Im kind of racking my brain here to to see the apeal in paying off the mortgage. I hear the FCF argument, but half a million invested in the market or treasures produces excess FCF when compared to extra payments. you cannot really argue taxes as you are paying taxes either way. 

 

The sinking fund needed to cover the mortgage is a lot less than you are anticipating. Think of yourself as a bond issuer. You sold say a 500k bond for 2.8% in 2022. The value of that bond after interest rate increases is 250k ish.  Why prepay and give that money back to the bank? let inflation and the higher rate environment ravage the face value of the note...

[Ross812]

What I mean is treat your mortgage as if it is paid by an annuity. If you have a 500k note @4% and your investments return an average of 7%; 370k will cover the 2400/month payment. Why prepay the extra 130k today?

[Parsad]

1 hour ago, Jaygo said:

The smith maneuver is when you borrow the equity in your home and invest. The interest on that dept will then be tax deductible. The remaining mortgage interest will remain Un deductible. 

 

Two other options for Canada:

 

1)  If your RRSP is big enough, move your mortgage into there...house is paid and the mortgage interest gets paid to your RRSP.  Not 12-15% annualized, but at least the only debt belongs to your RRSP.  Then borrow equity against the house to hold the investments you sold in RRSP account...now interest is deductible.  No capital gains in RRSP.

 

2) If you have a corporate account that is big enough, use a shareholder loan and pay off the mortgage...now you pay the interest over time to your corporate account.  Again, not 12-15% annualized, but debt belongs to corporate account.  Then borrow equity against the house to hold the investments you sold in corporate account...now interest is deductible.  Although you'll have possible capital gains that may offset any advantage from doing this.

 

Cheers!

[Parsad]

1 hour ago, Ross812 said:

Im kind of racking my brain here to to see the apeal in paying off the mortgage. I hear the FCF argument, but half a million invested in the market or treasures produces excess FCF when compared to extra payments. you cannot really argue taxes as you are paying taxes either way. 

 

The sinking fund needed to cover the mortgage is a lot less than you are anticipating. Think of yourself as a bond issuer. You sold say a 500k bond for 2.8% in 2022. The value of that bond after interest rate increases is 250k ish.  Why prepay and give that money back to the bank? let inflation and the higher rate environment ravage the face value of the note...

 

1 hour ago, Ross812 said:

What I mean is treat your mortgage as if it is paid by an annuity. If you have a 500k note @4% and your investments return an average of 7%; 370k will cover the 2400/month payment. Why prepay the extra 130k today?

 

In my case, I look after my mother.  If something happens to me, I need things to be simple for my mother to take over with my brother's help.  Having different loans in different places would be a pain for him as executor and the transition needs to be simple for my assets to go to my Mom, nephew and niece.

 

So almost everything is in non-taxable accounts, one corporate account and I have a simple small mortgage...no other debt, no complex tax strategies, no offshore accounts, no foreign property, etc.  Boring but effective!  Cheers!

[RichardGibbons]

15 minutes ago, Parsad said:

 

 

In my case, I look after my mother.  If something happens to me, I need things to be simple for my mother to take over with my brother's help.  Having different loans in different places would be a pain for him as executor and the transition needs to be simple for my assets to go to my Mom, nephew and niece.

 

So almost everything is in non-taxable accounts, one corporate account and I have a simple small mortgage...no other debt, no complex tax strategies, no offshore accounts, no foreign property, etc.  Boring but effective!  Cheers!

 

This is quite interesting to me, because I'm starting to consider death-related things, but haven't thought about it from this perspective (more from the simplistic "let's reduce probate fees" perspective.)

 

It does make me wonder if I should have a theoretical incremental return hurdle to clear when thinking about adding complexity.

[villainx]

2 hours ago, Ross812 said:

Im kind of racking my brain here to to see the apeal in paying off the mortgage. I hear the FCF argument, but half a million invested in the market or treasures produces excess FCF when compared to extra payments. you cannot really argue taxes as you are paying taxes either way. 

 

The sinking fund needed to cover the mortgage is a lot less than you are anticipating. Think of yourself as a bond issuer. You sold say a 500k bond for 2.8% in 2022. The value of that bond after interest rate increases is 250k ish.  Why prepay and give that money back to the bank? let inflation and the higher rate environment ravage the face value of the note...

 

That's kinda my view.  I feel more freedom knowing I got a great rate, and flexibility to invest more.  I'm still at financial point where I feel like I need any advantage I can get.

 

 

[thepupil]

9 hours ago, Ross812 said:

Im kind of racking my brain here to to see the apeal in paying off the mortgage. I hear the FCF argument, but half a million invested in the market or treasures produces excess FCF when compared to extra payments. you cannot really argue taxes as you are paying taxes either way. 

 

The sinking fund needed to cover the mortgage is a lot less than you are anticipating. Think of yourself as a bond issuer. You sold say a 500k bond for 2.8% in 2022. The value of that bond after interest rate increases is 250k ish.  Why prepay and give that money back to the bank? let inflation and the higher rate environment ravage the face value of the note...

 

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

Edited May 22 by thepupil

[Jaygo]

6 hours ago, Parsad said:

 

Two other options for Canada:

 

1)  If your RRSP is big enough, move your mortgage into there...house is paid and the mortgage interest gets paid to your RRSP.  Not 12-15% annualized, but at least the only debt belongs to your RRSP.  Then borrow equity against the house to hold the investments you sold in RRSP account...now interest is deductible.  No capital gains in RRSP.

 

2) If you have a corporate account that is big enough, use a shareholder loan and pay off the mortgage...now you pay the interest over time to your corporate account.  Again, not 12-15% annualized, but debt belongs to corporate account.  Then borrow equity against the house to hold the investments you sold in corporate account...now interest is deductible.  Although you'll have possible capital gains that may offset any advantage from doing this.

 

Cheers!

Thank you, Ive been doing the classic smith maneuver over the past 2.5 years with great success but at the end of the day its still dept and I am still paying the mortgage with after tax dollars. 

 

I just can't get over the hump of that 4k a month nut, I think it has become a psychological debilitation that must be exercised.

 

The rrsp idea is interesting though

 

 

 

[Eldad]

17 hours ago, james22 said:

 

Well Jesus said this 2000 years ago

 

Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal:

But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal

 

The ultimate delayed gratification. That chart kinda over simplifies things. 

Edited May 22 by Eldad

[boilermaker75]

15 hours ago, blakehampton said:

Interesting piece.
 

It’s crazy because 500 years itself could almost be sort of a stretch. For most people at least, immediate returns were probably still important as close as 100-200 years ago.

 

Is it really possible that this is somehow hardwired into us as humans?

 

It was once thought that to explain the complexity of humans would require well over 100,000 genes. We now know humans have about 21,000 genes.

 

What a human becomes is due to neuroplasticity and our life experiences. The same human could become a novelist, medical doctor, plumber, teacher, musician, terrorist, etc. Shortly after we are born there is an explosion in creation of synapses per neuron from about 2,500 to 15, 000. Through our experiences some of these connections get strengthened, long-term potentiation (LTP), and some get weakened or removed, long-term depression (LTD), which builds our neurocircuits. Adults end up with about 7,500 connections per neuron and which ones we have depend on our life experiences.

 

Most personality traits are 30-40% inherited and the rest is nurtured. So you can change yourself, such as how much self-control you have. It is not easy, otherwise there would not be so many addicts, but it is doable.

 

Humans have the same number of neurons as humans did 200,000 years ago, but our cognitive abilities are much more recent. Again, due to life experiences. If someone today takes an IQ test and scores 100 could be transported back in time 100 years, they will now score 130 on an IQ test. They would go from being average today to a genius 100 years ago, Flynn Effect.

 

Also, how your genes are expressed, which depends on nurturing, can be passed down to your children, epigenetics. 

[Spooky]

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/