the process

what’s best on paper or what’s best for your soul?

one of the central questions we’ve struggled with as we’ve been planning for our early retirement is where to allocate our money coming in: to investments or to paying off the mortgage early. but more than that, we often think about the question of whether the best decision on paper is also the best decision for our souls, or whether the two might be different.

an anecdote from someone we know, to illustrate the point:

years ago, this person talked to a financial adviser. at the time, said person had enough in savings to pay off the mortgage, and asked the adviser if it would make sense to do so. the adviser’s answer: the mortgage interest was providing a sufficiently large income tax write-off to make it disadvantageous to pay off the mortgage early. as a result, this person we know didn’t try to speed up paying off the mortgage, and a few years later, took out a HELOC, and eventually blew all of the home equity. when the person sold the house a few years later still, the outcome was to basically break even, and walk away with a few dollars, rather than pocketing the whole sale price, as would have been possible if person had disregarded the adviser’s advice and paid off the house years earlier.

obviously this example includes some suboptimal decision-making in later years (HELOC — bad! not saving — bad!), but it was all kicked off by making the decision that seemed best on paper. we think that if the person had paid off the mortgage, that would have instead felt deeply satisfying and ushered in a period of better financial decision-making.

we think about this same question — if we have X amount to allocate to investments and mortgage payoff each month, how should we divide it up? we know that paying off the house will be a huge psychic victory for us, and will make it easier to push through work when things are stressful, because we’ll know we could walk away any time. paying off the house would also then give us more money each month to invest, because we won’t have a mortgage payment. BUT, our interest rate is barely 3 percent on a 15-year mortgage, and our vanguard investments are doing better than that. we also do get the tax write-off on the interest, albeit a small write-off. so on paper, the right thing to do is make the minimum mortgage payments and allocate as much as we can to investments.

we know that owning our house free and clear will be such a huge victory for us and will nourish our souls in ways that you can’t put a price tag on. the sense of freedom we’ll feel, even if we don’t yet have enough money to retire early, in knowing that we can walk away from our jobs and find other jobs will be enormous. so we’re going against the best-on-paper decision in this case, and continuing to pay off the house ahead of schedule.

do you ever think about what’s best for your soul? what are some decisions you’ve considered in this light? are we the only oddballs who think this way? ;-)

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23 replies »

  1. Despite the differences in (potential) interest rates, we are also aggressively paying down on the mortgage as opposed to investing it. In running the numbers, we discovered that using the cash from selling our house – we know we won’t be retiring here – will provide sufficient funds to build/buy the FIRE house plus provide for living expenses for a couple years without needing to touch investments. You might find that the same approach benefits you in the fact that your FIRE expenses are so much lower.

    The argument for investments makes sense for people that are not pursuing FIRE. But I think there is a specific benefit to eliminating the mortgage for folks with FIRE on the close horizon. Glad to share the same thoughts as others!

  2. It is true that what is best for you isn’t necessarily indicated on paper. Personally, I take “the facts” into consideration, of course, but I always include how those facts apply to my life, and I do that as honestly as I can. Ultimately, I have to live with the decisions that I make, so a feeling of contentment in my soul is just as important – or perhaps more important – than what the so-called “facts” would tell you.

    In the end, no, you aren’t the only odd ball. I am an odd ball too! :)

    • Glad we oddballs can find each other here in blogland. ;-) Though of course all of us working toward FIRE are a different breed to begin with!

  3. I guess we’re all odd balls in that regard! I’ve done a lot of things for the contentment of my soul as opposed to doing what looks good on paper. Technically, I shouldn’t have gotten employed in the States. I should have just graduated from school and gone back to my home country. It made so much financial sense – free rent, higher salary, free car, etc.

  4. Great topic and one my wife and I also discuss. This is anecdotal but I’d say financial decisions are likely 80-90% from the heart/soul/emotions rather than just about the numbers. I love numbers, but I also know that it is just a piece of the puzzle.

    We recently throttled back on paying off the house early to be able to pour more into non-retirement savings to more quickly achieve a goal to step away from work for good. If I tie up all my available funds in our home (or retirement accounts), it gives me less flexibility to jump out and do the things that I feel I want to do in the near term (early retirement). Now it looks like we may even move to a smaller house, so the added cash/savings we stashed will come in handy to make a quick jump when the right opportunity arises without having to wait for a length sale process of our current house.

    This is just what works for us, but I totally understand how people love to have a house paid for. I paid off a car loan when the interest rate was lower than my investment returns just to have it paid off. Everyone is different, and it always helps to talk out the rationale of our decisions with our spouse and then maybe even a trusted family member or adviser.

    I love how there are really no black and white issues with personal finance. Everybody has different goals, but the key is that we can use our head and heart to consciously figure out what’s best for us (and hopefully not be pushed into a decision by panic or some bad circumstance).

    • Your plan sounds great! We’re planning to stay put, so we want to make sure we aren’t having to cover mortgage payments in early retirement. But your plan sounds perfect for you. Funny — we agree there aren’t black and white rules, too, but there are a lot of advisers who act like there are!

  5. I’m glad you wrote this post, I would agree that sometimes emotion and the benefit of the soul take precedence over the facts, but generally a gut feeling remains a good indication of what’s the right thing to do.
    In the example of the house, one thing to consider is that your mortgage is a guaranteed 15 year long cost. Investment in the stock market only generate potentially positive returns.
    With the stock market at an all times high (and expected returns at an all times low as it returns to the mean), I would consider redirecting my cash towards the mortgage payment to have a greater cashflow when the market becomes more attractive.

  6. I think this depends on the situation you’re in. You guys are in a good one! I think when all of your options build wealth, you have the opportunity to choose soul over paper. Choose what makes you happy, because there’s really no telling what could happen tomorrow in the market or in life.

    If you were taking about paying off debt or buying a new iPad, because an iPad would make your soul happy, follow the dang paper. :p But you’re not. Because you’ve got a handle on your stuff.

  7. In most respects I choose soul over paper. Happily, we do not have a mortgage as the house was a foreclosure but we’ve put a lot into it which has given us good equity. We do want to downsize at some point and with our love of old houses find one from the 1800’s-1900’s and that may not be best on paper but it’s right for our soul. :)

  8. I’ve never owned property so have no experience with mortgages, but I had a similar decision to make when I graduated from university. In Canada, we get an interest-freeze on our student loans for the first 6 months after we graduate, and any interest we pay after that can be written off in our taxes. Interest rates for student loans are also notoriously low, so on paper it would have been better if I invested the money rather than paying off my loans.

    Instead, I paid off my loans a few days after writing my last exam! I was sooo elated because it was my big goal fulfilled (even more than graduating!). As you say, it was a big psychic boost for me and definitely good for my soul. So I don’t regret it, even though I’d be slightly richer now. I can also say I graduated debt free, which was something that gave me confidence and the wherewithal to travel and move abroad.

    I’m an adventurous gal but I’m also not a huge risk taker, so for me feeding my soul was necessary to move onto my next big life challenge. I likely wouldn’t have left if I still had debt, even though it was just an administrative decision.

    This is all to say that your plan sounds great to me!

    • What you did is amazing — and how great that paying off your loans so fast let you travel! Such a great example of “best on paper” not being best for you.

  9. I’ve been paying off my mortgage aggressively, but I likely plan to stay here and want to keep this place clearly pre-marital assets. And I’m still maxing out my retirement accounts. By the time I will pay off my mortgage (by the end of 2017), I’ll have almost as much money in retirement accounts as the value of my condo, which is pretty solid.

  10. Another vote for paying off the mortgage, I too just wanted that feeling of owning it free and clear despite having a lower interest rate than market returns. But here in the Midwest it’s also a very affordable home and with so much equity in it, the interest wasn’t enough to deduct on taxes for the last several years. I think if the known opportunity cost was a guaranteed 3-5% I maybe could’ve dealt with lingering payments, but no regrets.

    • Same here! No regrets on paying off our mortgage a year ago, even though we know what the markets also did in the last year. You can’t put a price tag on the peace of mind of getting rid of that debt!