The age-old question: is it better to be debt-free or have a mortgage? This is a complex issue with no easy answer, as it depends on your individual circumstances, financial goals, and risk tolerance.
In this article. we’ll explore the pros and cons of both sides of the coin. drawing insights from two expert sources:
- Debt-Free Doctor: This blog post by a doctor who achieved financial freedom through aggressive debt repayment offers a personal perspective on the benefits of being mortgage-free.
- CNBC Select: This article features financial planner Rachel Sanborn Lawrence’s take on Kevin O’Leary’s advice to be debt-free by 45, highlighting the potential drawbacks of this approach.
We’ll assist you in making decisions and choosing the best course for your financial journey by examining these sources.
The Debt-Free Doctor’s Tale: A Journey to Financial Freedom
The Debt-Free Doctor, a practicing physician, shares his personal journey towards financial freedom. He emphasizes the importance of eliminating debt, including mortgages, as a key step to achieving financial independence and early retirement.
Key Takeaways:
- Debt is a burden: The doctor acknowledges his own missteps in accumulating student loan debt and emphasizes the importance of avoiding debt whenever possible.
- Early debt repayment: He advocates for aggressive debt repayment, even at the expense of other financial goals, as a means to achieve financial freedom faster.
- Psychological benefits of being mortgage-free: The doctor highlights the psychological freedom and peace of mind that come with owning your home outright.
CNBC Select: Challenging the “Debt-Free by 45” Mantra
In an interview with CNBC Select, financial planner Rachel Sanborn Lawrence challenges Kevin O’Leary’s suggestion to pay off debt by the age of forty-five.
Key Takeaways:
- One size doesn’t fit all: Sanborn Lawrence argues that aiming to be debt-free by 45 may not be suitable for everyone, especially women and minorities who face unique financial challenges.
- Debt can be a tool: She emphasizes that debt can be used strategically to invest in assets that generate returns, potentially exceeding the cost of borrowing.
- Focus on holistic financial planning: Sanborn Lawrence stresses the importance of a comprehensive financial plan that considers all aspects of your financial life, including debt, savings, investments, and retirement planning.
Weighing the Pros and Cons: Debt-Free vs. Mortgage
Debt-Free:
Pros:
- Financial freedom and peace of mind: Eliminating debt reduces financial stress and allows for greater flexibility in your spending and lifestyle choices.
- Early retirement: Aggressive debt repayment can free up funds for retirement savings, potentially enabling you to retire earlier.
- Psychological benefits: Owning your home outright can provide a sense of security and accomplishment.
Cons:
- Potential missed investment opportunities: Paying off debt early may mean sacrificing the opportunity to invest in assets that could generate higher returns.
- Reduced liquidity: Having a large amount of cash tied up in your home can limit your financial flexibility in case of emergencies or unexpected expenses.
- Tax implications: Depending on your tax situation, you may lose out on potential tax deductions for mortgage interest.
Mortgage:
Pros:
- Leverage for investment: A mortgage can allow you to invest in assets with borrowed money, potentially amplifying your returns.
- Tax benefits: Mortgage interest payments are often tax-deductible, reducing your taxable income.
- Liquidity: Having a mortgage allows you to access the equity in your home through refinancing or a home equity line of credit if needed.
Cons:
- Financial burden: Mortgage payments represent a significant monthly expense, which can limit your financial flexibility.
- Interest payments: You will pay interest on the borrowed money, which increases the overall cost of your home.
- Risk of foreclosure: If you are unable to make your mortgage payments, you risk losing your home.
Finding the Right Balance: A Personalized Approach
Ultimately, the decision of whether to be debt-free or have a mortgage is a personal one. There is no right or wrong answer, and the best approach will vary depending on your individual circumstances and financial goals.
Here are some key factors to consider when making your decision:
- Your income and expenses: How much money do you earn, and how much do you spend each month?
- Your risk tolerance: Are you comfortable taking on debt, or do you prefer to avoid it?
- Your investment goals: Do you have specific investment goals that require a certain level of liquidity?
- Your retirement plans: When do you plan to retire, and how much do you need to save?
It’s crucial to consult with a financial advisor to develop a personalized plan that aligns with your unique financial situation and aspirations. They can help you analyze your options, weigh the pros and cons, and make informed decisions that will set you on the path to achieving your financial goals.
Additional Resources:
- Debt-Free Doctor Blog: https://www.debtfreedr.com/
- CNBC Select: https://www.cnbc.com/select/
- Financial Planning Association: https://www.onefpa.org/
- National Foundation for Credit Counseling: https://www.nfcc.org/
By carefully considering your options and seeking expert guidance, you can make an informed decision about whether to be debt-free or have a mortgage, paving the way for a secure and fulfilling financial future.
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According to investor Kevin O’Leary of “Shark Tank,” if you want to retire by the age of 60, 45 is the ideal age to be debt-free.
According to O’Leary, paying off your debt, including your mortgage, by the time you are in your mid-40s puts you on the early path to success. It assists you in releasing yourself from debt at a time when your income is probably steady and may even be increasing. You can ramp up your savings so you can ensure a comfortable life in retirement.
In an interview with CNBC Make It in 2018, Oleary stated, “Most careers start in the early 20s and end in the mid-60s.” “Therefore, the game is more than half over when you’re 45 years old, and you better be debt free because you’re going to use the remaining innings to accumulate capital.” “.
While OLearys advice may resonate with some, Rachel Sanborn Lawrence, advisory services director and certified financial planner at Ellevest, says that aiming to be debt-free by 45 may be ill-advised. Not only is it unrealistic for many — it might also mean you leave money on the table.
Sanborn Lawrence discussed with CNBC Select who should be most cautious when following O’Leary’s advice and why.
Why not everyone should pay off all debt in their 40s
If being debt-free in your mid-40s sounds like a dream, thats understandable. Debt can often feel weighty, especially when its in the five- and six-figures. The idea of having student loan debt for decades can be unsettling for many consumers who graduate from college in their early 20s. In addition, you might worry that your debt will prevent you from reaching other financial goals, like homeownership, even though this is frequently untrue.
But mathematically, theres not always an incentive to be debt-free so soon, argues Sanborn Lawrence. If the interest rates on your debt are below 5% to 10%, it often makes most sense to invest your extra cash in the stock market, which has historically earned at above this rate, rather than rushing to pay off debt.
Mortgages, for instance, are at historic lows right now, so someone with an interest rate at 3% or below shouldnt feel pressed to pay off their home quickly and instead let their money grow in the market.
“You will be net positive if you are borrowing money at a lower rate than you can earn on that money,” says Sanborn Lawrence.
When you’re ready to invest your money, this three-question checklist will help you decide if you want to invest in the stock market.
3 Things I Learned After One Year of Living Mortgage Free
FAQ
Is it better to be debt-free when buying a home?
What age should you be debt-free?
Is it better to have no mortgage?
Is it smart to be debt-free?
Is debt free a good investment?
Being debt free is an admirable goal, but it might not make the most sense financially. Especially now, with mortgage rates so low, it’s cheap to hold debt. That leaves the opportunity to grow your wealth more through other investments. Let’s take a look at an example. Say you have a 30-year mortgage of $200,000 with a fixed rate of 4.5%.
Should I pay off my debts before getting a mortgage?
To receive a conventional loan, many lenders will require your DTI to be less than 43%. If you have a lower credit score or have less of a cash reserve, they’ll probably want the ratio to be even lower. Paying off your debts is going to reduce your DTI and allow you to better afford your mortgage payments each month.
Should you pay off debt before buying a new home?
Buying a new home is an exciting time in your life. Going into the process without the burden of debt is attractive to most people. However, before you decide to pay off debts prior to applying for a mortgage, there are a few pros and cons to consider. As you pay off debt, your credit utilization will decrease.
Do you have enough money to pay off your mortgage?
But depending on your situation, says Doug Flynn, a CFP based in Garden City, New York, it’s possible to get just as much satisfaction knowing that you have enough money tucked away to pay off your mortgage, without officially conducting the transaction. “Oftentimes, you will hear about good debt and bad debt,” he says.