As I’ve said before, you need not make every mistake yourself. You can learn from the mistakes of others and make better choices for yourself. Luckily for you, my hindsight is 20/20. If you’re facing the choice between paying off your debt or investing your money for growth, perhaps my experience can offer you some insight into the best choice of your circumstances.
Roughly 14.5 years ago, I had a choice between paying off my primary mortgage or investing a six-figure lump sum of money into the stock market. At the time, I owned two rental properties and my tenants both told me they would be moving. Faced with the prospect of having empty rental units, I immediately chose to sell. It literally never occurred to me that I could get new tenants. I was a young landlord who hadn’t heard of people like Brandon Turner of Bigger Pockets or Coach Carson. No one in my family owned rental properties so I didn’t know where to find the mentorship or guidance that would have opened my eyes to my many options.
Unfortunately, I reacted poorly and made a decision out of fear. Instead of doing a basic Google search on what to do when tenants move out, I sold off my rentals within weeks of each other. The housing market in my corner of the world was on fire!!! I’m sure it was the easiest money my realtor had ever made.
I took the proceeds from my rental properties and paid off my primary residence. Within a few weeks, I was completely debt-free! Woohoo!
What would’ve happened if I’d invested that money and kept my mortgage?
Firstly, I would not have had to pay a penalty. The mists of time have obscured the exact numbers, but I do seem to recall paying a penalty for breaking the mortgage on my primary home. Where I live, you can break a mortgage without penalty if you’re selling your home. However, if you’re simply paying off the mortgage, then the bank wants you to pay the interest that would’ve been paid as per the mortgage contract.
I was younger, financially un-sophisticated, and completely committed to being debt-free. So what did I do? I paid a 5-figure penalty to break my mortgage. That was definitely a money mistake! I had the cash from my two rental properties. I could’ve simply carved out a chunk of it to cover the remaining years’ payments under my mortgage agreement, and thereby avoided the penalty, while investing the rest. When the mortgage was up for renewal in a few years after the sale of my rentals, I could have just paid off the mortgage debt in full. Alternatively, I could have invested the whole lump sum and simply kept up with my regular mortgage payments until the mortgage was discharged.
By paying off the mortgage on my primary home, I didn’t invest as much as I could have in the stock market as soon as I possibly could. If I’d invested those proceeds in the market, then I’d be a hell of a lot closer to my original goal of retiring at 50.
We know that, up until the onset of the pandemic, the stock market has rewarded investors with a very long bull-run. Full equity portfolios have done amazingly well between 2009 and 2020. Brace yourself! My rental proceeds were over $100,000. Had I been as wise then as I am now, I would’ve invested that lump-sum of cash and continued with my life-long habit of investing a chunk of my paycheque every time I got paid. My investment portfolio would’ve definitely landed me in the Double-Comma Club by now…. and my mortgage would still have been paid off in good order.
Instead, I focused on becoming debt-free. I chose to pay off my debt instead of investing for my future. My actions were not aligned with my goals.
Why weren’t they aligned?
That’s a good question. Thinking back, my own ignorance about investing is the root cause of the mis-alignment. I didn’t know as much then as I do now. Also, I’d been watching the global monetary chaos created by the financial crisis in 2007-2008 and I wanted no part of it. Being debt-free felt safe. I didn’t have the luxury of relying on someone else’s paycheque to support my household. I very much craved the security of owing not a single nickel to anyone! In other words, I let my ignorance and my fear of being in debt guide my actions.
That global financial crisis caused the stock market to drop. Today, I know that such declines are to be relished because they are excellent buying opportunities. Steep drops mean that the stock market has gone on sale, and that it’s time to load up on quality investments in good companies. Back then, I naively determined that the “smart” course of action was to wait until things settled down before investing any money in the market. As I’ve written before, I waited far too long to start investing. Sigh… this is why hindsight is 20/20. Coulda-woulda-shoulda! I delayed the implementation of my investment strategy for years. It was the wrong move!
Now that I’m older, and wiser, I realize that I should have invested my lump sum. The market started its recovery in 2009. Sure, I would have invested in 2006 and then I would have gone through the rough years until the recovery started. It wouldn’t have been terribly fun, but it would have been quite profitable. Like I said earlier, that course of action would have gotten me much closer to my financial goals.
Don’t feel too, too sorry for me. Like I said, I used that lump sum to pay off my house. I haven’t had a mortgage on my principle residence in over 14 years! Trust me when I say it’s a good feeling. Not having a mortgage means a smaller overhead for my life. My emergency fund need not include 6-9 months of mortgage payments. I don’t have to worry that the bank is going to take away my home. Instead of forking over mortgage payments, I can make contributions to my investment portfolio. I sleep better knowing that my largest debt is in my rearview mirror.
Like they say – if I knew then what I know now, I would’ve made different choices. Hindsight is 20/20…c’est la vie!