Sometimes it’s about way more than math

by Nick on May 16, 2012

Am I the only one who gets way too caught up in “math” sometimes?  Sometimes I lose track of what’s really important to me.

Scenario #1:

  • $372,000 and 20 years left on a $460,000 30-year mortgage at 4%.  Purchase price $575,000.  House now worth $772,000.  Approximate monthly payment $2,200.
  • $50,000 in student loans with a 10-year payoff and 3% interest rate.  Approximate monthly payment $475.
  • No other debt.
  • Real estate taxes: $11,770.  Approximate monthly payment $981.
  • Monthly home owners insurance, utilities, cable, internet: $900.
  • Money outside of retirement:  $400,000.
  • Total monthly debt and house carrying costs: $4,406.00.
  • Net worth (not including retirement) $750,000.

Scenario #2:

  • No debt.  Paid for house.  Bought for $450,000 and paid down aggressively.  Now worth $606,000.
  • Real estate taxes: $7,525.  Approximate monthly payment $627.
  • Monthly home owners insurance, utilities, cable, internet: $750.
  • Money outside of retirement:  $75,000.
  • Total monthly debt and house carrying costs: $1,377.00
  • Net worth (not including retirement) $681,000.

Obviously these numbers aren’t perfect apples-to-apples, but they’re used to demonstrate a point.  They’re based on two actual properties for sale in New Jersey.  The difference is house size really (4 bed v. 3 bed).  Scenario #2 has $325,000 less money outside of retirement but $422,000 less in debt.  It also has $69,000 in lower net worth.

Assume you make a salary that’s enough to “afford” each of these scenarios.  You’re ROCKING it and taking home $7,500 a month – $90,000 per year after taxes or about $140,000 per year.  You’re just kicking butt!  (And anyone can live off of the difference between $7,500 and the Scenario 1 carrying costs, right?  After all housing-related costs you have $100 per day to spend!  Easy, right?)

So which one would you pick?

I’ve been doing a lot of thinking along these lines lately.  Both of these houses are more than I want to spend on a house, but I can see myself having a choice between scenarios like this if and when we actually buy a house to live in.  I ask a bunch of “mathies” (folks who are blinded by math) to choose between these questions and inevitably I get one of these responses:

  • In scenario 1 you could always pay off your mortgage.
  • The stock market return is much higher than your interest rate so I’d make the spread.  Why wouldn’t you?
  • In scenario 1 you have a larger house increasing in value on less of your own money invested, so you take advantage of other people’s money.  You’d be dumb not to take advantage of that.
  • In scenario 2 you have very little money at age 44 outside of retirement.  What if you lost your job?  In scenario 1 you have $400,000 and can live for over 6 years without running out of money if you cut your lifestyle down.  By that time you could sell your house and rent (or move down in house then) and have a lot more money left over.

You know… the “math” answers.  And they’re not wrong.

But why not Scenario #2?  If your monthly carry costs are less than $1,300 you free up so much more than the math can do.  You get rid of money payments and really free up your time.  If you lose your $100,000 gig and can only score a $50,000 gig it’s OK.  In fact, you could probably early semi-retire and be all set.

Imagine knowing that if everything went wrong, you could keep your house functioning on a job that doesn’t require working into the night or an advanced degree.   Imagine not “needing” your job!  Imagine being able to follow your dream through the lean years without fear of leaving your family at risk!  Imagine how that would feel…

Lately I’ve been thinking scenario #2 is the way to go.  Sure your net worth is lower and you have a fraction of the money in the bank.  But you get rid of monthly obligations that your life frees up.  You free up time.  You free up choice.  Basically there’s no need to make $7,000 per month if your monthly necessities cost about $2,000 with housing, food and utilities.  Throw in a few hundred bucks a month to cover transportation costs and you’re still under $2,500 per month.  That’s freedom.  That’s where I end up.

There’s more “math” involved, too.  So it’s an overly simplistic example.  For example, $400,000 invested in the stock market should yield $2,250 after capital gains taxes (assuming 8% return and 15% capital gains or dividend taxes).  So that reduces the net before real-estate tax and mortgage interest deductions cost to about $2,200 per month.

Sometimes it’s about more than the math.  I’ll take freedom to retire early or follow my dream over the spread between 8-12% investment return potential and a 4% mortgage.  Yeah, and I know mortgage payments get “cheaper” as time goes on because of inflation.  I get the “math.”  What’s important to me, though, is beyond the math.

What about you?  Remember in order to be in either of these scenarios you need to live on much less than you make.  In order to save $400,000 in 10 years while making those payments you need to consistently invest a lot of money.  And in order to pay off hundreds of thousands of dollars you need to pay similar amounts.  Neither of these is “easy” but both are possible.  And both of them are pretty awesome if you ask me.  Scenario 1 is just a lot more stressful.

If you could choose between these two categories 10 years from now, which one would it be?  

Until next time, put your credit card down and slowly step away from the mall!

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{ 35 comments… read them below or add one }

Thad P @ May 16, 2012 at 8:04 am

I think you say it very well in the post’s title. It is more than just math. It is more than a dollar value. It is the value of time that you talk about.

I’d go with Scenario 2.


Nick May 16, 2012 at 12:14 pm

A few years ago I might have picked #1. I think going through 2008-2012 helped me refocus quite a bit. Buying free time is one of my focuses lately for sure.


Michelle May 16, 2012 at 8:27 am

I would go with scenario 2, just because the monthly needed cash flow seems much less.


Nick May 16, 2012 at 12:14 pm

Yep – it certainly gives you options.


Financial Conflict Coach May 16, 2012 at 9:27 am

I value my time and mobility more than money. I’d likely choose scenario #2.


Nick May 16, 2012 at 12:15 pm

Mobility is a great one for sure. Sometimes seeing such a HUGE balance in the bank is tempting, but I’m with you.


Modest Money May 16, 2012 at 10:28 am

I’d personally be leaning towards scenario #2 as well. Reducing stress and giving yourself more freedom is very important. To be clear of debt and have a house paid off in 10 years would be awesome.


Nick May 16, 2012 at 12:16 pm

I can’t imagine how good it would feel to have an emergency fund and no debt at all… I’m hoping to be able to explain it soon enough! In the meantime, I’ll be fighting the good fight.


Sean @ One Smart Dollar May 16, 2012 at 10:32 am

I have to say #2 also. Much less stressful of a scenario.


Nick May 16, 2012 at 12:18 pm

I wish I could value “stress.” Whenever I make a “less stress” choice, I remember young Nick telling my Dad how dumb he was for having no mortgages and using cash for everything… his response was basically “You have no idea. I have no stress.”


Jason May 16, 2012 at 10:34 am

I would definitely go with scenario #2. The cash flow is less and you could start saving much more aggressively to build up your emergency fund again.


Nick May 16, 2012 at 12:19 pm

Great point too. It probably wouldn’t take too long to retire from scenario #2, too.


Kooz May 16, 2012 at 10:42 am

Trying to hold the variables of both scenarios in my head hurts my brain, but it seems like it doesn’t matter–if you’re okay either way, the path to more freedom, choice, and time for what’s important to you seems best. I guess it’s more of an issue when someone has to choose between options that both have significant, but not apples-to-apples comparable, downsides. Then the weight given to various elements becomes much more important.


Nick May 16, 2012 at 12:51 pm

Yeah, I’d take either scenario over the alternative of no money or net worth (or worse) for sure. Either of the scenarios put you in a good place where if crap hits the fan you can ride the wave for a long time. I think the first scenario requires a “better” (READ: Higher salaried) landing than the second though, unless you use the cash to get out of debt at that point, so that’s how I end up with scenario 2.


Kurt @ Money Counselor May 16, 2012 at 10:57 am

#2 for me. With no debt, savings outside of retirement can rapidly be built up, so I’m not concerned about that risk. What appeals to me is the far lower fixed obligations in #2. I don’t fear a layoff as much as fearing being trapped in a job I hate just because “I owe, I owe, so off to work I go.” Life’s too short for that.


Nick May 16, 2012 at 12:55 pm

That’s a great point about the fear of golden handcuffs, too. (You phrased that issue much better than me, Kurt!). The plan is for something to the effect of Scenario 2 to play out for me over the next 10 years (or less, hopefully). At that point I can’t wait to hear the fancy-pants New Yorkers tell me how dumb I am… and I can respond by saying “I used to say that to my dad all the time… when I was a kid. You have no idea. I have no stress. I can leave whenever I want.”)


MyMoneyDesign May 16, 2012 at 1:01 pm

I’m leaning on Number 2. Cash flow is more important to me than the cold numbers.


Nick May 16, 2012 at 1:08 pm

Yeah – to play devil’s advocate for a minute, my “math” friends will suggest taking the $400,000 from scenario 1 and buying one (for cash), but likely multiple (with debt) investment properties putting down $100,000 each, with each of them netting $500-$1000 per month in cash flow (assuming everything goes right…). Then you would have $2000 – $5000 per month of passive income to pay your scenario 1 debt and house carrying costs….



From Shopping to Saving May 16, 2012 at 2:08 pm

I’d definitely go with Scenario 2. There’s just so much more freedom with that scenario, and I LIKE freedom.

“But you get rid of monthly obligations that your life frees up. You free up time. You free up choice.”

This is what’s important to me, and I think there comes a point where math does not matter. You have to look at the big picture, and math only plays a role in that picture, but this isn’t a math test!


Nick May 16, 2012 at 3:05 pm

Yep – either scenario is “successful” for sure. But simplifying your finances and freeing up your mind and time is really, really worth a lot in my book.


Michelle May 17, 2012 at 12:32 am

Will no one pick scenario 1? Are all of your friends far smarter and more disciplined than…dare I say *most* Americans? I’m going to play devil’s advocate like you said, and go against the majority of your respondents…just for giggles. I mean it’s not that far from our own sad reality here, to be quite honest. Yes, I have a personal finance blog in which I want you to read and not think that the authors are complete morons, but at the same time I’ve got to be real. We bought this house a few years ago and were told that we actually could afford $50,000 more than what we paid. We thought we were being smart. We thought we were being frugal. It’s a damn good thing we didn’t listen to the mortgage broker and real estate agent who told us we could afford more, because we would have been living on the streets by now. Or worse…with our parents! 😉 Seriously though, don’t most Americans buy houses way more expensive than they should? Just because they CAN? Having been through this and being a quick learner, I now realize that we should have purchased a less expensive house and paid down the mortgage aggressively. Hindsight is 20/20, right? So yes, be smart…don’t be like “that guy!” that will be paying for his house til he’s 60, and never be able to retire. Live below your means and be sensible. It’s so much better for your soul, and who can put a price on that?


Nick May 17, 2012 at 11:11 am

Haha – It looks like you’re more on Scenario 2 even playing devil’s advocate. I think more regular folk PF bloggers have had the aha moment and figured out that time and stress have dollar signs attached and that just because you “can” buy something it doesn’t mean you should.


Monroe on a Budget May 17, 2012 at 12:24 pm

I would pick #2 if the smaller house meets all your needs right now and can be adapted to what you would like in the long run.

That’s basically the decision we made in 2004, and it’s working out.

Don’t count on the real estate market to go up or even remain stable. I live in Michigan, and the recession and foreclosure crisis rattled the home values. Even if we wanted to move, our house would never sell even for what we owe on it, much less what we paid for it.


Nick May 18, 2012 at 3:04 pm

That’s a good point about adaptability of a smaller house. I’ve been keeping that factor in my mind during our search, too. Glad it’s working out for you, too! I imagine it’s been pretty crazy out there in Michigan.


CultOfMoney May 18, 2012 at 2:24 pm

It all comes down to the trade-offs. Do you want to trade-off more years of more advanced work and larger payments in order to have more comfort and wealth signals over the next so many years in a larger place? Or would you rather have something more cozy\cramped and the freedom to go play golf during the week in your 40’s and 50’s? Obviously the 2nd option has more room for the unexpected too.


Nick May 18, 2012 at 3:06 pm

I have a buddy who tells me at 3.75% for a 30 year mortgage that I’m crazy because of the flexibility it gives me. He makes a very good point, but at some point getting beyond managing debts and needing six figures a year has a crazy value. It’s not like any of these will have us with six kids sleeping in a den…

It’s definitely not a decision to make lightly but it’s one that makes me sleep better at night… I guess we’ll see how this process goes.


ryan@ Loans NZ May 18, 2012 at 4:06 pm

When we are all going to sleep at night, while we close our eyes most of us starts making numbers, if you have a big debt, I don’t think that you’ll fall asleep for a while, but if you have no debts, you will feel more relaxed, and you’ll be avoiding the stress and the question of, what can happen tomorrow?.
You will definitely have more energy and will be living a more pleasant life. I go with scenario # 2


Nick May 23, 2012 at 4:34 pm

Having more energy is a great side effect too. Imagine having no worries about your four walls and feeding your family…


Funny about Money May 19, 2012 at 1:19 am

Scenario 2 turned into Real Life for me. Paying off the house — practically over my financial adviser’s dead body (“You’re already overinvested in real estate!!!”) turned out to be the smartest thing I ever did, financially speaking.

If I’d still had to pay a mortgage at the time I was laid off, I would have lost my home and this evening would be writing to you from under the Seventh Avenue Overpass. Assuming they have electrical outlets in underpasses, that is.


Nick May 23, 2012 at 4:36 pm

Wow. Definitely glad you were able to weather the storm after the layoff. I know and understand all the “pile of cash” arguments but there’s something about having an impenetrable financial wall around your family that is really, really compelling.


JP @ My Family Finances May 19, 2012 at 8:54 am

In general, I’ve always felt like taking on any debt was like buying stock on margins.

Personally, I feel as though age really needs to factor into the equation. One concern I have for the millenial generation is that they are pretty risk adverse. It’s a good and a bad thing. What your example shows is bigger risks can lead to bigger rewards. Younger people can afford larger risks, but smart risks, not foolish ones.


Nick May 23, 2012 at 4:39 pm

We’re almost another depression era generation it seems. I don’t have much against mortgage debt but we seem to be in a “borrow first” environment. School loans are a bigger culprit – you have 17-year-old kids taking out 100,000 in loans to finance a political science degree with no sense of what they’re going to do with the degree. They spend more time choosing between two cell phones than reading the student loan documents and wondering whether they’ll get a return on their education….


Financial Advice for Young Professionals May 22, 2012 at 11:22 pm

I think I could make the sacrifice now, when I’m young, but when I’m older I know I’ll probably want nicer things. I don’t mind going into debt for investments like real estate but I would never go into debt for non-appreciating assets like cars and vacations.

Either way, sometimes I think we analyze things too much. Sometimes you have to just go out and do it and live with the consequences 🙂


Nick May 23, 2012 at 4:40 pm

Yeah – either way it seems like you’d be OK. I can’t yet get beyond imagining life without a mortgage though…


Matthew January 3, 2013 at 10:15 pm

Scenario #2 is a better choice for me. It suits me.


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