For as long as I can remember, I’ve loathed debt. In fact, I didn’t have a credit card until I met my wife, and she wisely schooled me on the concept of a “credit score” (I still think it’s funny that someone with no credit history is less likely to get a home loan than someone with a bad credit history). So recently I’ve been shaken by the concept that maybe certain debt isn’t all that bad.
0 Down, 0% interest
A few years back, I financed my first purchase: A TV from Best Buy at 0 down and 0% interest for 2 years. I think it was two years, anyway. It’s been a while.
Let me stop right here and say two things:
- It is dumb to buy new tech. Most technology depreciates fast. Very fast. Almost as fast as a new car, but I’ll come back to that in another post.
- Financing at 0% interest is dangerous. If you don’t understand the idea of setting aside money (which is no longer yours) to pay for a financed purchase, you shouldn’t do it.
But yeah, I financed the dumb tech. I’ve long since payed off the full amount, and I still have the TV. But while I could easily have paid for it outright at the time, I recognized the opportunity to make interest on that money over the course of the 2 years. I think the TV was around $1000, so let’s do the math:
$1000 / 24 months = $41.67 per month
If I put that $1K into a CD at 1.5% interest for 24 months (which is a TERRIBLE investment, but for arguments sake…), I made $14.66 in interest.
Put into a total stock market index fund with a 7% average return, I made $73.52 in interest.
Side note: thecalculatorsite.com has a cool calculator for compound interest.
These amounts are small to be sure, and maybe not even worth fretting over. But what if we apply the same logic on a larger scale…
Is My Mortgage a Steal?
So back to the present. I have about $71K left on my original $200K mortgage at 3.25% interest. I’ve been paying it down like crazy; doubling my principle on a monthly basis. But now I’m not so sure this is the best approach.
First off, the bank doesn’t care that I’ve been putting extra down on my mortgage. If a series of unfortunate events ensues and I am unable to make my monthly payments, the bank will take my home just the same. With this mindset, it might make more sense to put that additional money away as a cushion for such circumstances.
Second, 3.25%. It’s not 0%, but it is low. If the stock market does average 7%, it makes sense to just sit on that debt and gain the difference in interest. The only time this logic doesn’t hold true is during a multi-year bear market, and those don’t come around often.
So with these two in mind, I’ve adjusted the automatic payment on my mortgage back to the minimum (for now). I will take that extra ~$1200 per month and split it between a Vanguard Total Stock and Total International Stock index fund.