The Mental Side of Debt

Tom Bradley recently responded to some questions from young homeowners about debt and it got me thinking about the mortgage paydown versus investing debate, again.  For us there will be an enormous amount of emotional well-being when we’re debt-free.  While we invest every month by contributing to our Registered Retirement Savings Plans (RRSPs) and maxing out our Tax Free Savings Accounts (TFSAs) throughout the year, we also work on killing our mortgage debt rather aggressively.  Here are some reasons why:

  • Killing our mortgage is one of the safest investments (i.e., less risky investments) we can make.
  • After the mortgage is done we can stop paying our bank and start paying ourselves (more) money.
  • Debt is somewhat draining and stressful for us – we need our jobs to fuel our existing mortgage debt.
  • When we own our home we won’t risk losing it should something unexpected happen (e.g., job loss).
  • We cannot control our investment (stock market) returns so we might as well control what we can (debt repayments).
  • Real estate like the stock market is cyclical, there will be downturns eventually and we prefer to be debt-free when the next decline hits. It may be difficult to sell a house if you’re forced to.
  • We don’t know anyone who is well-off financially who decided to carry lots of mortgage debt for many decades.
  • Borrowing rates won’t always be this low; rates will rise, eventually, someday and when that day comes we won’t care.
  • When you service debt you don’t have money for other things you may need or want.
  • I don’t have to write about this debate anymore!

As far as I’m concerned we’ll have much more financial flexibility when we’re debt-free. Usually the easy answer to the mortgage paydown versus investing debate is  “do whatever you can to earn more money” but that argument largely ignores real risk factors that are beyond your control, some of those I’ve mentioned above. Investing diversification principles are something I take to heart.  I don’t like keeping all my financial eggs all in one wealth creation basket so a debt-free home along with our RRSPs, TFSAs and non-registered accounts and we’re becoming adequately diversified.

We haven’t lived through as many stock market and housing cycles as Tom Bradley has (Read in: we’re not as old as you Tom) but it simply makes sense that as an investor you don’t take on more risks than are necessary nor can you weather the storm through. The reality is holding onto debt comes with risks. We’re certainly not complacent when it comes to debt and likely never will be.

What’s your take on debt? Are you working on mortgage debt like we are?

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

34 Responses to "The Mental Side of Debt"

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  2. There are a lot of great points in this thread and I won’t bother to repeat them. Put me in the camp for advocating paying down your mortgage as quickly as you can manage. Being debt free is tremendously liberating for us.

    Fast mortgage pay off is a great choice for most and is one good step on the ladder towards FI.

    1. Thanks Deane. It’s not that we don’t invest as you know, we certainly prioritize our TFSA over pretty much everything but when there is any money leftover it goes on the mortgage. I figure it’s a nice guaranteed return and stress-reliever 🙂

      1. Mark, sounds like you’re in a great position to do both -save and kill debt quickly. Balance in life is usually good.

        No doubt your discipline with savings, and expenses, along with financial education is contributing to your success.

        It seemed to be the best path for us too.

  3. Why is it that people have no mental problem taking out huge loans to acquire a single, highly concentrated non-productive asset which barely keeps pace with inflation over the long-term, yet would never think of taking out the exact same size loan to acquire a highly diversified portfolio of inflation-beating, dividend paying assets?

    1. I have no idea SST. I can speak from my personal experiences, I don’t view a home as a great asset. At least in Ottawa it’s not. It’s a major expense and because of that, I don’t want more debt associated with it than necessary. I will eventually borrow money for investment purposes but not until my mortgage is more manageable. We’re about 3-5 years away from that possibility. Thanks for the comment.

  4. We’re actually doing both, although mortgage won’t be an issue soon. We’re selling the house to get into a year-long RV trip across Canada, US and some southern countries. We will probably buy a smaller house when we come back so that we don’t have much debt to get rid of.

    That begin said, investment shouldn’t be a reason to not pay down debt, but debt should’nt be a reason to not invest for retirement as well.



  5. I agree-pay it off as soon as possible! An after tax, no risk return of 4-5% does not exist right now-so it’s a very good risk/return. The sense of freedom is great too (I can attest to that!), but there is a certain discipline that a bit of debt provides-you need to service it! So I find that having some debt (for investments or home improvements) after retiring the mortgage satisfies that mental habit of having a little pressure that you had when paying the mortgage-stops the money from slipping away into worthless stuff. But the difference is that you have a choice and can take that little bit of debt, pay it off, have that great feeling then take on some more to invest again. It doesn’t cost much these days with such low interest rates. I probably wouldn’t do it at an 8% rate, but at 2-3% I like the ‘discipline’ this ‘optional debt’ enforces-and it builds wealth if the return is higher than the cost. It’s a bit of a game to keep the mind sharp.

    1. You always seems to write about the debt-free posts! 😉 Kidding aside, kudos to you and your wife for your debt focus. Now the income you make can largely go to basic living expenses and the wants in life, such as home renos or travel or anything else. Hopefully my wife and I can get there in another 5-7 years while we keep investing since investing (maxing our TFSAs and hopefully RRSPs in the years to come) is important for us as well. Thanks for sharing Keith.

  6. For anyone who isn’t sure about investing in the markets or wants a guaranteed return – I’d recommend paying off all debt. It’s the safest, easiest way to increase net worth and improve cash flows. It doesn’t take an expensive advisor to tell you how to do it because its so simple either

  7. I seem to be in a minority in that I always thought of our house/mortgage as neither an asset nor a liability. It was always more of “we pay XX$ a month to live here” situation. I think it may be because just before we were at the “buying” stage we watched people have to walk away (literally) from their homes because they were so far underwater. Their mortgages were significantly higher than the homes could be sold for. They had bought in good faith and now they had lost every $$ in equity they had put into their homes for the down payments and the principal-part of the mortgage payments.

    So while we paid down our mortgage assertively, we saved money in our RRSPs aggressively. The priority was always the RRSPs. (There were no TFSAs.) The tax returns and some unexpected extra earnings went on the mortgage. As the mortgage rates dropped at renewal, we kept the payments the same, so more went to the principal.

    I do think it feels great to have no mortgage. But I’d rather have a mortgage and cold, hard cash $$ in the bank, than have no mortgage and very small cash savings. Apparently I may be in the minority on that one, though.

    (I notice you’re trying a “balanced” approach that seems reasonable to me.)

    1. Very much a balanced approach Bet. We try and max out our TFSAs every year (investing); we try and contribute and optimize our RRSPs every year (investing) and we pay down debt. I think this is rather balanced. Could we invest more and forget our our mortgage prepayments? Yes, but the debt hanging over my head would bother me. I think amongst my friends I’m in the minority, I don’t want debt but that’s OK. Personal finance is personal for a reason. Thanks for your comment.

  8. Great job. I couldn’t agree more. We focused on paying off the mortgage several years ago and I sleep like a baby. Very liberating. We realized that everyone we knew who was “rich” was debt free and didn’t have a mortgage hanging over their head. The interest we were paying was making someone else rich. Now, that money gets invested every month. Wouldn’t change a thing.

    1. I know very few people who are rich that have lots of debt Lee. Either I don’t know the right people, my sample set is too small, or they know what that getting out of debt and staying out of debt is a path to wealth. I’d like to think it’s the latter. 🙂

  9. As you know my wife and I paid our mortgage off with-in 5 years of buying the home. We knew the interest rate was low and balanced with our investments we made debt freedom a reality. It will always be a situation that is personal to the people who are in it. Since we still have about 20 odd years until retirement now we are thinking about rentals and other ways to maximize return with our money. Mentally having the stress gone is a relief, yes.

    1. I’ve learned that debt is very much a personal and emotional subject, it goes beyond the math. I just know for us being debt-free will open up a few options for us and that’s what we are working towards. Thanks for sharing Mr. CBB and congrats again on no mortgage.

  10. I’m with you Mark, to a certain extent.
    Like you, I do not like a mortgage on my own house. I managed to pay mine off twice (divorce) much to the bank’s delight. At the same time I was putting minimal amounts in to my RRSP just to keep in the habit so to say. Besides, if you want to try the Smith manuver you do need some loose funds in stocks or something.
    At any rate I do not owe any money to the bank for my necessities such as a house or vehicle. I do however have a HELOC (nice to have the house paid off) that I use for investment purposes only. As long as the dividends can 1) pay the HELOC interest 2) pay down some of the principle – every month, then I am quite happy to let the HELOC run. The longer it goes the less principle I will have if/when I do decide to cash out – such as an interest increase. Until then I let it ride. Presently at $14K of dividends for $3.5K of interest. SO my principle gets knocked down by 10K per year at the expense of my paying tax on the balance of the dividends – but at a lesser rate than ordinary income.

    A bank advisor once asked me if I was not nevous running a debt load invested in stocks,
    My reply to him was – Only when they are going down.

    But as long as the divs keep coming in and paying down the principle then you just try to keep a cool head – and maybe buy more stocks at a reduced rate.
    I am still working so there is money coming in to even out the dips and dives. Once I retire I may revise my attitude to this though.


    1. Great comment Ricardo. I have been tempted to try the SM but have not done so yet.

      For those that do this, the SM, then yes:
      1. As long as the dividends can pay the HELOC interest, and
      2. As long as dividends can pay down the principle – you are good.

      I figure we have 5-7 years left on the mortgage and hopefully we can continue to max out TFSAs and RRSPs in the process.

  11. There is the spread sheet answer, and then there is as Mark put it, the emotional answer. Not having debt of any kind was very high up on my priority list and I will never regret getting rid of it ASAP. There is that unquantifiable feeling of not owing anybody anything. It helped me to get through the good times and the bad times and it was worth a LOT to me yet could not be demonstrated on the spread sheets. I have no regrets when it comes to paying off our debts.

    1. Yes, the math can often say one thing and the emotions can state another. This is how I feel Lloyd: it’s hard to quantify the feeling of not owing anybody anything. I am having no regrets putting extra money on our mortgage but I know some folks disagree with me and that’s OK.

  12. Paying down mortgage as quickly as you can is a no brainer. No mortgage debt will provide a lot more options and flexibilities. The low rates won’t stay forever, too many people think it’s cheap to borrow so they over leverage. That’s a bad idea in the long run no matter what.

    1. It will be nice in 5-7 years to stop writing about the mortgage paydown vs. investing debate for us. 🙂 I never really hear about folks struggling to get by when they own their home and they have no debt.

  13. I find the mental aspect of finance to be far more fascinating than the actual money part. I’d love to dissect the reasons listed, but as long as you are fulfilling your financial goals, perhaps it’s well worth sacrificing a few points in the bank account for happiness, regardless of what the debate says. One of the biggest success factors in finance is establishing a plan and sticking to that plan (just ask Buffett); you seem to be doing just that.

    1. 100% agree with your last point SST, we are investing but we are also killing the mortgage beast at the same time. I think our balanced plan is working for us. Thanks for the comment.

  14. Paying down mortgage or investing is a debate that will always be talked about. I do not own a house, so I don’t have to think about which one to do. I hear some people say if you can get a better return somewhelse than it would be beneficial to go that route.
    With interest rates low right now, it would be some easier to find something that has a higher return. The Canadian banks is a good example as their yields are likely higher right now than the mortgage rates. I think investing in rental properties would be a better situation to not pay extra on the mortgage. When interest rates rise than the mortgage pay down should be a bigger priority.

    1. Yes, it might be easier to find some stocks that are yielding more than our mortgage however at the end of the day, debt is debt. The sooner I don’t have any the easier my life will become.


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