Why Paying Off Your House Later Is A HUGE Risk

[Music] jackson is in tampa florida hi jackson how are you hey i'm doing well how are you better than i deserve what's up hey got a question regarding the mortgage i know you guys talk about um i have no debt and i know you talked about putting 15 percent towards investments and then the rest going towards your mortgage my wife and i my wife and i are incredibly risk tolerant lost about 50 000 in our mutual funds over the past month and still just sold my car invested that money straight into the stock market because they're on sale um so i know well i think that the math says investments you're obviously a very successful man so i'm not going to argue with you but i'd like to genuinely know why why do you go with that approach versus the investments if you're risk tolerant well risk tolerance has to do with what your emotions will allow you to do without going into freakout mode sure okay um and so someone who has a very low risk tolerance can become a poor investor based on the fact that their low risk tolerance causes them to not take enough risk agreed someone who has too high a risk tolerance can cause them to be a poor investor because they take risky investments that end up losing more than they make because they live out on the edge yeah i'm i'm like i'm 99 mutual funds i'm one percent in football helmets so like i'm in i like it oh this is soaked we have a new measure of things this is awesome born on the air today i love it the fact that jackson you get the award regard you could go do whatever you want after that so no i'm kidding all right so uh um yeah but my point is okay so i grew up in the real estate business and one of the things you do in the real estate business is they take your risk meter and they break it with a hammer real estate people have complete risk tolerance we're idiots we're idiots we don't even know there's risk okay and that's what caused me to go broke because i was not measuring risk so here's the here's what ends up happening debt equals risk more debt equals more risk less debt equals less risk uh it adds risk to the portfolio you're saying i can emotionally tolerate that that's one discussion another discussion though is what is the fastest route to wealth regardless of risk tolerance okay what's the fastest route to wealth and and you know and within that then okay we've got to discuss can i stomach that with my risk tolerance do i have enough risk tolerance to go that route the fastest surest route to wealth not just and most likely so i would go back to something like the 10 167 millionaires we studied and the number of them that said because i had a high risk tolerance i kept a mortgage the whole time and i invested all the money and uh today i have a million dollars in mutual funds i have two million dollars in mutual funds and i owe 600 000 on my house the number of them that said that was less than 10 percent 90 plus percent said i got my house paid off and i dumped everything in mutual funds in my 401 case okay so the practical facts are the the normative way the most likely way the highest probability way according to the data to bill wealth is to invest into mutual funds and to get the house paid off um instead of because otherwise you would say you would say all right i'm going to borrow as much as i can borrow on the house all the time and every so often i'm going to refinance it and throw all of that money with the cash out into the and stay mortgaged up to my eyeballs yeah if the concept worked you would do that but the problem with that is is that it affects other things in the unseen and that is is that the borrower slave to the lender you make different decisions in your life when you don't have a house payment about your career yeah it puts different stresses on your relationships it you treat you know your children different there's different levels of health issues when there's no debt versus if there's debt regardless of risk tolerance all of those things end up applying out there in the real world yeah i keep going back to the car you said you're you sold your car to an investor do you need it so no no i don't that actually that was just uh i sold i i was able to sell my car it was a honda a 2008 honda fit i sold it for 300 more than i bought it for uh five years ago and so i bought an electric bike and i take that to work i'm only three miles from work um the problem is i do live in you know florida so i'm gonna start sweating here soon um but no the that just i just my life and i felt like we've got our 2015 minivan and like we can be a one car family okay um okay yeah so that was more well i guess i'm just i'm having a little bit of trouble wrapping my mind around the math of it but maybe i need to let that i don't think it no here's the okay the math here's how the math works all right in graduate level studies in finance or maybe even in a good school in the senior year level um we are taught to christina and i were taught to analyze two different mutual funds okay an aggressive growth stock mutual fund has a measure of risk called a beta the higher the beta the higher the risk the higher the peaks and valleys if you chart it the more volatile it is okay high beta more risk okay low beta less risk and so you take an aggressive growth with a bay a high beta and uh maybe a maybe a 2.5 beta or something like that and then you take a growth in income that might have a 0.8 beta less than one beta a one beta is the s p 500 what the market does just to give you an example okay so here's how the math works if you're if you in order to compare those two they have different volatility so comparing them apples to apples is naive you see what i'm saying sure so you've the way you mathematically adjust for it is there's an inverse formula where the beta is flipped on its head with in an inverse fraction so that the beta reduces the higher beta reduces the return of the of the risky investment and the lower beta raises the return of the lower investment so that after adjusted for risk mathematically you can compare these apples to apples does that make any sense it does i knew you were smarter than i was and so yeah that that well it's just it's just what i was taught academically it's not i'm not yet but so so the thing is what what has never happened though we're taught that in the financial world christina but we're not taught to do that with debt and so we compare a house with a mortgage equally to a house without a mortgage or an investment a property with a mortgage equally to an investment property without a mortgage and we do not apply the increased risk a beta to the math formula and so our that's what i mean by real estate people the risk meter is broken they don't analyze for risk and we don't re and we don't mathematically adjust for risk and so when we add the beta idea or concept to your question it says you are taking more risks so we should put a higher beta on your plan a lower beta on my plan and when we risk adjust mathematically our plans are going to be fairly equal okay that's helpful i really appreciate it cool i don't know if that made any sense or not something like a barrel fish hooks but it is it is the truth that's the academic way of approaching it the spiritual way of approaching it is the borrower is slave to the lender 100 of the references in the bible to debt say debt is stupid it's not a sin you're a slave you're a fool you're impulsive it always says that so if the bible says and i'm a christian if the bible says negative things about that it doesn't say it's a sin doesn't say i'm going to hell if i get a mastercard it's not a salvation issue but but if spiritually my heavenly father is saying in his handbook there's nothing good about debt then i have to read that and believe it if i'm a person of faith absolutely and then i can also go over here and use my brain and use a beta and either way i come to the same conclusion yep that's such a great way of meshing those two things together yeah it's uh but but the you know i actually um was speaking to a graduate level group at uh vandy one time and walked them through that on the math idea and they're like looking at me like i've never heard that before it's because nobody teaches it nobody talks about debt equals risk so you need to factor a beta into it a measure of risk mathematically into it and when you put in a measure of risk mathematically into it it takes away the advantages of debt and guess what we all know that because when you're debt free you build wealth faster so duh you know that's kind of the way this whole thing works it's an interesting discussion i appreciate his question that's great

Channel: The Ramsey Show Highlights

Views: 746,791

Keywords: the dave ramsey show, budget money debt cash, real estate, insurance, how to make money, dave ramsey, save, credit card, compound interest, buying house, buy, snowball, Why Paying Off Your House Later Is A HUGE Risk

Id: Qn00_7sdAvs

Length: 9min 33sec (573 seconds)

Published: Mon May 02 2022