We’ve been using Dave Ramsey’s formula to pay off debts, not incur new debt, etc. We are down to 2 debts:  Student loans (consolidated) with a $151,000 balance @ 3.875%, and the home Mortgage, $165,000 balance @ 4.5%. We have 6 kids, so lots of household expenses (mostly groceries), but we can trim a little more fat.

We have $1,000 in savings for emergencies (just replenished after an unexpected 800 car repair). We pay cash or we don’t buy it.

Income is around $80,000 per year, with no great increases in the foreseeable future (government employee).

At this point, we’ve been throwing extra money at both of these debts and don’t seem to be getting anywhere. I was awarded a public-service award that will pay up to $10,000 per year on my student loan debt (payable quarterly) for up to 6 years. This year the award was $8,900. Of course the student loan company used the money to advance my due date and not pay towards principal, but I had it placed on principal eventually and continue to make my normal payments.

My gut tells me to focus on the student loan debt, especially because I have the award to help and pay the mortgage at its normal rate, but then I look at the interest rate being higher on the mortgage and think I should pay it off first.

I do use the student loan interest deduction on my taxes. Last year was the first year we had enough expenses to justify itemizing deductions, so I don’t think that will be something that will happen every year, we just had an extraordinary amount of medical expenses.

Thanks for any help you can provide us!

Thanks for writing, Jackie. It sounds like you have your hands full with six kids and significant student loan debt. However, it also sounds like you guys are making smart decisions with an ultimate goal of debt freedom. Congratulations on clearing all consumer debt – that’s a great first step!

In my mind, I would probably treat both of these debts in the same manner as I would a mortgage. In “Baby Step” language, that’s near then end of the process, around Step 6 – Paying Off the Mortgage.

My reasoning for this is that both debts will take some time to pay off, even with a healthy $80,000 household income. I’d hate to see you guys not make progress on the remaining baby steps over the next several years while focusing solely on student loans and the mortgage.

Now, as far as interest rates go, that wouldn’t necessarily be the determining factor in deciding which to pay off early when the time comes. As Chris at MyTotalMoneyMakeover.com writes,

A common misconception about paying off debt is that you need to go after the high-interest-rate bills first. The reason is because big rates mean more money is going out the door. The sooner you stem that, the more money you’ll save.

That’s the wrong way to gauge which bills should go first. You could spend months paying off a high-interest-rate loan and become disappointed when you still see an outstanding balance. You’ll subconsciously think that you’re not making progress, and you’ll stop paying extra. Then the balance grows back and frustrates you even more.

Getting out of debt is all about modifying your behavior. You need a plan that shows you the progress you’re making. That’s what the debt snowball is. Instead of automatically paying on the loan with the big rate, you list your debts smallest to largest by amount owed. This is the key to you not falling off the wagon…

Read the rest of Chris’ post here.

Because your student loan debt and mortgage are essentially equal in terms of balance, interest rate and tax deductible eligibility, I’d look at the decision of which to pay off first from more of an emotional or personal perspective.

Student loan debt is unsecured debt, meaning you can’t sell something to pay it off. You also can’t get rid of federally guaranteed student loan debt by declaring bankruptcy. You can’t “downsize” into a smaller student loan, and now that you’ve already consolidated, you can’t refinance down the line to lower your payment. That means you are pretty much stuck with it

Some may argue that you are just as stuck in a mortgage these days, as it’s generally harder to sell a home in this market. But that’s not true in all cases, and if you have even a small bit of equity, you could afford to negotiate a price that would attract buyers in a crunch.

If it were up to me, I’d start whittling away at the student loan debt before paying off the mortgage. I would only do so after establishing a solid emergency fund (our family’s goal is 6-12 months of basic, household expenses…closer to 12 months). With a large family, I’m concerned you do not have enough put away for emergencies.

With a fully-funded emergency fund parked in a high-yielding, safe savings account, I’d then look to put away money for my own retirement (Dave recommends 15% of your income), and then begin setting aside some for the kids’ college – well, with six kids it might mean setting aside A LOT for college!

Continue to make your mortgage payment and minimum student loan payment until these other goals are achieved. By that time, your household income will likely have increased a bit, and you can throw even more each month towards paying off the student loan debt early. When that debt is cleared, take the money you used to send to Sallie Mae and add it to your mortgage principal.

Have a realistic, long-term goal to be 100% debt free, but do challenge yourself. If the goal date is too “long-term,” it may never get done.

Good luck on your journey to debt freedom – it’s a tough hill to climb, but the view from the top sure is sweet!

Ask the Readers: Any additional advice for Jackie? What would you do if you were in her shoes?

“Our budget is $475,000 to $490,000.”

Huh? These young people barely looked old enough to buy an adult beverage, and they were considering a half-million dollar home? They had my attention.

For the next thirty minutes or so I watched these young people roam from house to house with their real estate agent. I was extremely impressed with their thoughtful considerations of each house. You know, like which one had enough room in the backyard so their two dogs could play without feeling “claustrophobic,” and which house would be best for “entertaining.” After all, these are important considerations when just starting out. End sarcasm.

It was at this point that I began to regain my strength. I think it was adrenaline actually, as I had the overwhelming urge to reach through the television and smack some sense into these people.

Admittedly, I know very little about this couple, other than one is an “account executive” and the other is in medical sales. However, I think it is safe to assume that unless they inherited a couple hundred thousand dollars, they planned to borrow most of their first purchase.

$3,000 a Month for Thirty Years

Let’s run some numbers working with our assumptions. I think the couple settled on a house listed for $490,000 and paid about $475,000 (I don’t remember the exactly sale amount). I’d like to think they saved up at least 10% to put down, which is a fairly large amount of money for this size house. Perhaps they did have $50,000 to put down, and financed the remaining $425,000 on a 30-year mortgage.

Their monthly payments would be around $2,281 before taxes and insurance, which could easily add another $800-$1,000 a month, bringing their total monthly mortgage payment to over $3,000. Let that sink in for a moment.

This 27 year-old couple was about to sign a binding contract promising to make 360 payments at $3,000 a month for the next 30 years. They would be 57 years-old by the time they paid off the mortgage.

During those thirty years they would likely have children, and have to continue working like maniacs to make that $3,000 a month payment. They would need to save for retirement, pay for the annual vacation (or two), buy, maintain and replace seven or eight cars between them, deal with a medical emergency, deal with a medical emergency with their parents, deal with a job loss, etc. They would have to deal with all of life’s curve balls with a $3,000 a month obligation hanging over them.

“But We Can Afford the Payments”

When I watch people engage in this type of transaction, I can’t help but be a little sad for them. And my feelings aren’t limited to those taking out a huge mortgage – even though these are usually the longest of financial commitments. Many people borrow money for expensive cars and such which obligate them to costly monthly payments for a number of years because they can “afford the payments.”

Hearing the statement, “we can afford the payment” is a sure-fire sign someone can’t afford the payments. Marketers have won the battle of convincing us that we can afford things we can’t if we only have to pay for it every thirty days, rather than all at once. But what happens when you hit a bump in the road? What happens when life happens? Because trust me, it will.

Someone will get sick. Someone will get hurt. Someone will lose a job. Someone will get stuck in a soul-sucking job and dread Monday mornings like a trip to the dentist. Life is not always rosy. Things happen. I’m not being a pessimist, I’m being a realist.

It’s hard to tell that to a couple 27 year-olds with their whole life ahead of them and without a care in the world. Sometimes people have to find out the hard way. I just wish people would listen to others who have been down the same road (if you are a parent, you can relate to this).

My First Place: An Alternate Ending

Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000. Their monthly payment drops to about $800 before taxes and insurance, they avoid having to pay private mortgage insurance (PMI), and they can seriously consider a 15-year mortgage, or paying off a thirty-year mortgage in the same amount of time. They could easily be debt free before 40, house and all.

Yes, they would be giving up a little space for entertaining, and the dogs would have to get used to a smaller backyard, but imagine the freedoms they would enjoy. Imagine them as a 40 year-old couple with a $225,000 house, a modest pile of savings, and zero debt.

Imagine a young mom having the option to stay home with the kids. Imagine those kids going to college and graduating without debt because their parents can afford to help. Imagine those kids getting married and making a similar first-home purchase decision because they admired their parents’ frugality. In one single decision, that couple could complete change their family tree, and one day leave behind a legacy of debt freedom for generations to come.

This post appeared in the Canadian Finance Carnival

Now that we are debt free, and that small, but ever-so-slowly growing number at the bottom of the net worth calculation is black, I am committed to calculating our net worth once a month and tracking it over time.

Assets Minus Liabilities

The basic definition of net worth reveals the number is essentially the difference of liabilities, or debts, subtracted from your assets. Seems simple enough. The problem is, there are many different classifications of assets.

In corporate finance, assets are generally classified by their liquidity. That is, how easily can they be converted to cash. Cash saved in a bank account is obviously the most liquid form of asset, while equipment might still be counted as an asset, but since it would have to be sold for a depreciated value to convert to cash, it is considered less liquid.

The same goes for most households. For example, our emergency fund is our most liquid asset. The two vehicles we own, and their estimated private sale value, could also be listed as an asset. However, knowing what a pain it can be to sell a car, I’m reluctant to include their value as part of our net worth.

And then there are houses. Assuming your home’s value wasn’t decimated in the recent housing market bubble, or you have been diligently making a mortgage payment for several years, chances are you have equity in your home. For example, if you own a home worth $200,000 and only owe $170,000, listing both the house and the mortgage as an asset and liability, respectively, would net increase your net worth by $30,000.

A more extreme example, after a couple decades of making a mortgage payment, might lead to a $100,000 bump in net worth. But to realize that money, you would have to sell your home, something you might be unwilling to do.

Calculating Two Net Worths

We simply calculate two net worth figures. The first, I call our “Total Net Worth,” is calculated by subtracting all of our liabilities (mortgage) from all of our assets (savings, house, etc.).

I then calculate a second net worth figure I call our “Liquid Net Worth.” This only includes assets that can be quickly converted to cash, or are already in cash form. This calculation would account for any stocks, bonds, CD ladders, and cash-based accounts such as our emergency fund, goal-oriented accounts at Smarty Pig, and various sinking funds, but would not include “hard assets” like cars and houses.

In most cases, this second net worth calculation is much lower, but is, in my opinion, a more realistic look at your current financial situation. Imagine someone $20,000 in credit card debt with negligible savings, but $35,000 in equity in their home. A $15,000 positive net worth presents a skewed view of their real financial shape. A more accurate, and sobering, liquid net worth calculation would show them nearly $20,000 in the red, and would hopefully motivate them to work on getting out of debt.

Ask the Reader: Do you currently track your net worth? What method do you use? Do you include all assets and liabilities, or some assets and all liabilities, or some other combination?

Personally, I believe if one has the ability to pay their debts, any debt, they should pay them. This idea doesn’t stop with mortgages. I don’t like voluntary car repossessions or walking away from credit card debt you legitimately owe and can afford to pay.

Think about it. When you signed your signature 27 times the day you took on a mortgage, you accepted some risk that the “investment” you were making would hold its value. The lender made the same calculated risk, and even required you to buy private mortgage insurance if your down payment was small to transfer some of that risk away from them.

Now, there is a difference in someone losing a job, struggling to make their mortgage payment and other obligations, and someone who simply wakes up one morning and decides they are no longer going to pay their bills. Those in the latter category rationalize their decision with sentiments like, “Well, why should I continue to pay for something that is of lesser value than when I bought it?”

Using that same logic, we’d walk away from new car loans, and even credit card debt, because the things we “financed” are not worth nearly the same value now as when purchased new. Besides the question of ethics, walking away from your mortgage, or any debt, can have serious financial consequences.

Damage to Your Credit

If you simply walk away from your mortgage, you credit will take a hit. If your credit is already shot, you may not care. If you are of the opinion, what’s a good credit score good for anyway, then you may not care.

If you recognize that maintaining a good credit score is a necessary evil in today’s society because insurers, employers and lenders check scores when making offers, you might consider damage to your credit score a negative consequence of walking away from a mortgage.

Apart from the hit to your FICO score, walking away from your mortgage could also present legal issues. Walking away from any debt means the lender is free to foreclose (or repossess) the item you financed and sell it at whatever value the market brings. For foreclosed properties, that usually means a big discount.

If the amount the property sells for isn’t enough to clear the debt owed against it, guess who the bank can legally come after? That’s right, you. So “walking away” doesn’t necessarily mean you are off the hook.

Alternatives to Walking Away from a Mortgage

Workout payments. If you are legitimately in trouble, for whatever reason, and are unable to make your mortgage payment, attempt to work with the lender. Most mortgage issuers are preparing for a higher rate of foreclosures in the near future, which could mean big losses for them. They’d much rather have customers continue to stay in the home and make payments.

Short sell. If you do decide to sell, discuss the option of a short sell with your lender. Basically a short sell means selling the property for less than is owed, at a mutually agreed to price amongst buyers, sellers and the current lender. Be sure to negotiate a sale without recourse – meaning the bank cannot come after you for the balance of the loan (as described above).

Do nothing. If your mortgage is underwater, meaning you owe more on your home than it is worth, but you are able to continue making payments, then the most attractive option may be to do nothing. Stay put. Hope that the economy comes around in the next few years and your value comes back. In time, by continuing to make payments, you will eventually reach a point where your house is no longer underwater.

The Housing Bubble Lessons Learned

I lived in rentals growing up because my mom could never afford a down payment on a home. Until just recently, my family leased a house until we were debt free. During that time as a renter, all I ever heard from others was that we were making such a mistake by not buying a home. A home was a fantastic investment. Renting was like throwing money away.

Well, I wonder how many of those same people still believe that. A home can be a good investment, but mostly it’s just shelter to keep you and yours warm and dry. That’s all it is. And it doesn’t matter if you pay a mortgage company or a landlord to keep that shelter.

Of course, you may have more freedoms owning real estate, but you have more responsibilities, too. There are pros and cons to virtually every financial decision we make, so do what works best for your situation. Whatever you do, avoid buying real estate until you are on a solid financial foundation and avoid viewing it as a significant investment. After all, we’ve seen how quickly that “investment” in real estate can drop.

The good news is you don’t really need a book to learn about financial independence (though, if you do decide to read more on the subject, I highly recommend Your Money or Your Life). All you need to do is remember the seven secrets below.

Secrets to Financial Independence

1. Pay off debt. Yes, even the mortgage. I can hear the mathematicians screaming now – “PAY OFF YOUR MORTGAGE?” What about the tax deduction? What about all-time low interest rates. I don’t care about either one. To reach financial independence I’m all about reducing monthly expenses. A mortgage represents the highest monthly expense in most family budgets, and ours is no exception. Knock out credit card debt, car debt, student loans and the mortgage and you’ll owe a monthly payment to no one, which puts you on the fast-track to financial independence.

2. Quit buying crap. And while you’re at it, quit signing up for crap. The other day I sat down to try to tally our monthly expenses. Seems simple enough, doesn’t it? Problem is I kept forgetting little expenses we’ve signed up for. Oops, there’s the Netflix charge; then the gym membership fee. The other day the TiVo bill hit. I enjoy all three of these examples immensely, but altogether they represent about $50 a month. Talk about being nickel and dimed! Of course, there are other things I’m forgetting to list here. You can see how challenging it is to come up with a total monthly outgo figure these days!

3. Forget about trying to impress people. Do you have any idea how much money is wasted in a lifetime trying to impress other people? Just think of the things we buy, and the options we choose, for show rather than for practicality. Flashy cars, big houses and expensive jewelry matter little to those working towards financial independence, because we recognize you’ll be paying for that stuff long after we hang up the employee badge.

4. Make savings a top priority. If I had a financial do-over, I’d start saving half of my income from the very first day I started working. I can think of no faster way to accumulate wealth, build financial discipline, and expand your creatively frugal way of thinking to make things work on a meager income. Trouble is, very few of us ever thought to do this, so right out of the gate we needed more like 90% of our income just to pay for all the goodies we accumulated. To make it happen, talk to your payroll office and elect to have 50% of your paycheck deposited in an online savings account (I’ve reviewed a few of the best online banks in the past), separate from your primary checking account. Now, live on what’s left. Every year you pull this off you are essentially buying (saving) a year of freedom from earning an income.

5. Be aggressive early on. I’m a conservative person by nature. I don’t like to take big risks – with money, or life in general. But if I could talk to my 20 year-old self now I’d tell him to live a little. Invest a little money (10% of your portfolio or less) in that stock you just know in your gut will be a winner, because you know the quality of the people in management, or you believe in their product. Don’t be afraid to invest in that “aggressive” portfolio in your twenties, and early thirties. You’ve got time for ups and downs. You’ll win some, and you’ll lose some, but at least you won’t have any regrets.

6. Be conservative as you near financial independence. As passionate as I am about taking risks when you are still young, I am equally passionate about being conservative in the last few years leading up to reaching your “number.” That’s the time to start dumping the risky stuff, and start gearing down into low-risk investments. Some of your nest egg should be in cash, a little in bonds, or if you like simplicity, maybe something like a LifeStrategy Income Fund that takes the thinking (and emotions) out of investing your nest egg, or at least a portion of it. Be sure to check recent returns on such funds, as many billed as “conservative” lost their shirts in the recent downturn. At this point in your journey to financial independence you should be fairly immune to market swings, and more concerned with protecting the principal you’ve worked to accumulate.

7. Determine your own “number.” Speaking of your “number,” don’t let some financial egghead across a desk look down his nose and tell you that you need exactly $1.4 million to “maintain your style of living in retirement.” Garbage. Most of these guys immediately follow this with a sales pitch for an annuity, or a scare tactic about clients living to 90 years-old and running out of money. If you are dedicated to living frugal, paid off all your debts (see step 1), and built a comfortable nest egg based on your individual needs, you should be just fine.

Financial independence doesn’t have to be a mythical place we only visit in our day dreams. There are enough people out there living it, writing about it, and experiencing the joys of being free from the requirement to earn an income to survive. Learn from them. Model your behaviors after them. But be careful who you follow.

As author Thomas Stanley proved in his book, The Millionaire Next Door, most self-made millionaires look a lot different than the Paris Hiltons of the world. They probably drive a two year-old car (or older), shop where you shop, and live in a modest home. They don’t wear flashy jewelry, have a string of letters after their name earned from a decade of schooling in the Ivy League, and their idea of a fun family vacation probably looks like a week-long trip Disney World, not Paris or the Mediterranean.

The real secret to financial independence is to start living your life with that goal at the forefront of all your financial decisions. The longer you put it off, the worse your chances of ever succeeding will be. But for those who start early, and stay passionate about their dream, the payoff at the end is one of the more freeing experiences we can ever enjoy.

What percentage of your net income should go towards a mortgage?  I don’t want to rush into anything so I was hoping you could give me some ideas as to what to avoid.  Would you consider giving me a couple pointers?

Thanks for your question, Jeremy. Before we get into specific numbers, I have to commend you for even taking the time to ask the question. Unfortunately, many people are still rushing out to sign up for a mortgage without considering the years of financial obligation they are taking on, and what impact that will have to their overall financial plan down the line.

The 28/36 Rule

There are several ways to look at the answer to, “How much house can I afford?” Some people, including most Realtors and mortgage brokers, banks, etc. use what’s called the 28/36 rule. The formula means mortgage lenders like to see your monthly mortgage payment come in at less than 28% of your gross income, and your total monthly debt payments, including your mortgage, represent less than 36% of your gross income. Notice I said gross income, as in before taxes and deductions. The fact you asked your question specifying “net income” means you are on to something.

When someone asks how much our annual income is we typically respond with our annual salary, and any other income from self employment, etc. But the number we use to budget from, and live off, is much lower after Uncle Sam stakes his claim along with benefits deductions for health insurance, and other employment-related expenses that come right out of our paychecks. So why not use this figure to determine mortgage affordability?

Because using gross income increases the amount of house agents can sell you and mortgage brokers can lend you, which means higher commissions and larger interest payments in their pocket. It’s not that they are doing anything wrong, it is just a different way of looking at the question of affordability.

The Frugal Mortgage Calculator

I actually have a more frugal formula for determining how much you can borrow for a home. I personally would not spend more than 25-30% of my take home pay on housing. So if your combined household income is $4,000 a month, meaning the direct deposit or paychecks from your employer totals $4,000 a month, then I would not spend more than $1,200 a month on a mortgage. To do so would mean giving up money towards another financial goal such as debt freedom, kids college savings plans, or even an early retirement.

What If the House I Want Comes With a Higher Mortgage?

Well, this is a case of suffering from champagne tastes with a beer pocketbook. Who doesn’t want to buy more than they can afford at some point in their lives? As I see it, you have three options.

• Ignore my advice and buy the bigger home with a bigger mortgage payment.
• Save up for a larger down payment to drive down the amount financed, and the resulting monthly mortgage payment.
• Shop for a more modest home.

Of course I would strongly consider option number three, because larger homes come with larger expenses (taxes, utilities, maintenance, etc.), even if you can get the monthly mortgage payment lowered with a large down payment. Still, option two does have some advantages. By waiting to save a larger down payment, chances are you can also clear some debt, which may improve your credit score and qualify you for a lower interest rate (and a lower payment). Still, consider the increased costs of owning the larger home, even if you technically qualify for it based on income.

If you are wondering, we currently spend about 18% of our monthly take home pay on housing. But that wasn’t the case when we first moved in (fortunately our income has increased over the years) – and it caused a real pinch those first few months. Don’t make the same mistake we did!

Ask the Readers:  How much of your take home pay are you currently spending on housing?

Approach your existing lender. You already have an existing relationship with the lender, if you have always kept lines of communication open and always sent your mortgage repayments on time, there is no reason for your existing lender to turn down your home refinancing request. A benefit to refinancing your home through your existing lender is that they will often offer you special deals just to keep you from taking your business elsewhere.

However, you may benefit from keeping an open mind. Just because it’s often easier to refinance your home mortgage through your existing lender, doesn’t always mean it’s worth it. Sometimes, switching to a different lender will get you a better deal in the long term. Contact at least ten different home mortgage lenders and ask them for a quote. Tell them that you are making a general inquiry and are currently contacting multiple lenders to find the most competitive rate. Letting the lender know that he’s got some competition can’t hurt any.

Review refinancing offers.  After you have called ten lenders and received their quotes, it’s now time to review the offers. Don’t fall prey to the common tactic used to draw in borrowers. For example, a common tactic used by lenders to draw in borrowers it to offer discounter of waived closing costs in exchange for a higher interest rate.

While you will not be losing any immediate out of pocket cash, in the long run accepting such a rate can turn out to be more expensive than simply sticking by your current home loan. If you have approached numerous lenders and are yet to encounter a package that suits your needs, keep looking. There will always be a lender offering more competitive rates.

Applying for the mortgage refinance.  It’s probably been a while since you have applied for a home mortgage, and luckily for you lenders have improved on their speed a bit.  The overall home refinancing application process is very similar to applying for your home’s first loan. However, the wait time for this application will be decrease to approximately three to six weeks and you can now apply for a home refinance loan through the comfort of your own home.

That’s right, you only have leave your home if you want to, you being present during the physical application is no longer a requirement thanks to technology. Loan officers fill out an application form on your behalf with the information that you provide to them through the electronic application.

Jazmin Espinal is a professional freelance writer and the owner of Capital Web Writing, a web content solution for businesses and webmasters. To contact Jazmin or to see samples of her writing, please visit CapitalWebWriting.com.

Now, our idea of a tiny house might be two bedrooms instead of three, or anything less than 1,200 square feet.  Most in and around real estate would agree.  However, I’m referring to extremely tiny houses – in the neighborhood of 100 square feet.  We are talking just enough room for small couch, kitchen and loft with a bed.  Upscale versions feature indoor plumbing.

The benefits of living in such a tiny house are captured in the interview with Peter King, a tiny house builder in Vermont.  Imagine being able to construct one of these tiny homes in a couple weeks, pay cash for it (no mortgage), and live off the grid thanks to a solar panel.  Sounds like my kind of place!

Now back to reality.  There is obviously no way my family of four (five if you include a dog  that weighs as much as some people) could occupy such a tiny house.  However, there are some valuable lessons here for those of us who are not single.

My wife and I have kicked around the idea of downsizing our home.  We decided to stay put for now, but examples like this always get my downsizing juices flowing again.  I start dreaming of a cheaper mortgage payment, lower utilities, lower taxes, and less stuff. Even thought we can’t move into a 100 square foot home, that doesn’t mean we couldn’t look at downsizing to a smaller home than the one we are in now.  And we could enjoy many of the same benefits, though admittedly to a lesser degree than those who live in tiny houses.

Benefits of Buying a Smaller Home

• Lower monthly mortgage payment
• Lower taxes
• Easier to pay off mortgage completely in a shorter time
• Less space to fill with furniture
• Smaller lot (maybe) to maintain
• Significantly lower utilities

So what’s holding us back?  Well, there’s the idea of moving, which sucks the energy right out of my body.  To add to it, there’s the realization that we would need to do a little work to our house to get it ready to go on the market.

At the moment, I don’t feel like doing either one – moving or fixing up! And, to be perfectly honest, we’ve sort of grown into our current space, and would need to get rid of a ton of stuff from all rooms before we could even consider moving into less space.  Still, it is something we will continue to consider, particularly if the right house with the right deal comes along.  In the mean time, I’ll live vicariously through people like Peter King and other ultra-frugal friends.

Having a mortgage is one of those culturally expected things, along with car payments and credit cards.  Most financial gurus fall backwards out of their chair when you mention paying off your mortgage early, instead of plowing more dough into their carefully selected portfolio of investments – most of which are not properly aligned with your risk tolerance, nor your overall investing strategy.

The market downturn, which apparently is still turning, seems to have more and more people reevaluating the question, “Should I Pay Off My Mortgage Early?” Up until now conventional wisdom said no. Invest that money in the market, and keep paying interest to the bank to get the tax deduction. Now I’m not so sure. Seems to me like we would have been better off to be sitting here with a paid-for house than a handful of worthless investments.

That is basically what Steve was alluding to in a post that caught my eye some time ago, “What If Saving Was Stupid?” One of the more profound statements was that “money in the market isn’t saved – it’s invested, and investment carries a risk that it won’t be there when you need it.”  So true; as many of us have had the recent misfortune of discovering.

But eliminating debt, including your mortgage, is a sure thing.  Assuming you are not borrowing any new money, paying off $50,000 in debt means that $50,000 debt can never come back.  It doesn’t matter what the market does.  It doesn’t matter if we are at war or in peace time.  It doesn’t matter how strong or weak the U.S. dollar is – that debt is never returning to your personal balance sheet.  To me, that is a powerful incentive to use the $50,000 to pay off my mortgage early.

Sure, I could invest that same money in the down market and watch it go to $60,000 by next year.  But that is far from a sure thing.  Besides, without a mortgage I could easily start dropping $1,000 a month into an investment account or in high-yield online  savings accounts.  It wouldn’t take very long at that pace to hit $60,000 in investments. And if you really liked having a house payment, you could always refinance your mortgage.

What this question really gets to is your tolerance for risk, and your dreams for the future.  I hope to “retire” from working for money earlier than most people, and I cannot do that with a mortgage payment.  So for me, thirty years of payments is not an option.  With a paid-for house, and very few expenses, retiring would be a much more viable option because it would not take much in the way of earnings to sustain a frugal living.