A common focus in many personal finance articles is the eradication of debt, no matter what the interest rate the borrower is paying. Sure, there’s some quibbling about which order do you pay off the debt, low balance vs. high rate (Debt Snowball vs. Debt Avalanche), and nobody really seems to care which method is chosen as long as the debt monster is slayed.
An episode of the Fire Drill podcast last year, which I listened to on the train from Los Angeles to Seattle, had Dandan Zhu as a guest who absolutely blew my mind with her stance on debt. She routinely carried thousands of dollars of credit card debt (THE WORST KIND!) because it helped her cash flow and it wasn’t that big of a deal with her $200k per year income. At first, my debt-averse-conditioned-mind thought she was being reckless. I had to stop the episode, take a break, and listen to it again because I was fuming mad. That was a sign to me that I had never actually thought through why I felt the way I was feeling hearing a successful woman make a sub-optimal decision for her own personal finances. Her actual decision didn’t affect my life at all, but it definitely made me start thinking more deeply about my strongly-held beliefs.
As I recently recounted, I refinanced my mortgage earlier this summer. I was 13+ years into a 30 year mortgage, and I had every intention to continue making regular payments and some periodic extra payments so I could pay off my house by my 43rd birthday in a scant 7 more years. And then I got to thinking, after hearing another Fire Drill episode – one in which I was actually on the record saying I was in favor of paying off the mortgage a full ten years early! But another guest, Carl from 1500days.com, explained that the more financially savvy move for him and his family was to maintain a mortgage, money borrowed at cheap long-term rates, and invest the difference. My mind was blown again. The only debt I have remaining in my life is to my credit union that holds my mortgage. Would I willingly hang onto a 5-figure debt for 17 more years so I would have more spare cash to invest? Well, the answer is yes and no – I didn’t hang onto the original loan, but refinanced into a low, fixed-rate, 15 year mortgage and even cashed out a small amount of equity so I could make an extra $4k deposit into my brokerage account to get the investment ball rolling sooner! A mere 5 months ago, I was dead-set on paying off the mortgage as quickly as I could, but now I want to hang onto my cheap borrowed cash as long as I can (179 more monthly mortgage payments to go!)
And then I started rethinking other commonly-told pieces of financial advice, which is the actual purpose of this post. Young workers are told to save money and put it into their Roth IRA – you know the one, it’s after-tax dollars at the time of contribution, and those dollars grow tax-free until retirement and you never pay taxes on those dollars again. But because they are after-tax dollars, you have fewer of them to invest for retirement. I am proposing that for younger investors, it would be better *psychologically* to invest in a Traditional IRA, where you get the tax break in the current year. For someone in the 12% tax bracket, this choice would save the worker $720 in taxes, which could be put towards the following year’s Traditional IRA and make it that much easier/quicker to max out the annual contribution limit of $6k (at the time of this writing).
The argument I’m making is that it’s better to accumulate more dollars and build that cushion faster, younger, than it is to be tax-optimized for dollars you won’t even get to see for 40+ years. Would you rather have $6,000 in a Traditional IRA or $5,280 in a Roth IRA. For the purposes of this example (12% marginal tax bracket), they are the same amount, but there’s a sense of accomplishment in maxing out an IRA, and obviously the dollar figure is a higher number, even if the difference is just the taxes that will be owed someday a long time from now. Once your income changes, or it becomes less of a stretch to max out the annual IRA, it is fine to max out a post-tax Roth IRA for the benefits that everyone argues for in the 5 million other articles about Roth accounts. I just think there’s a mental win in seeing the dollars accumulate faster in the Traditional IRA (same argument for a 401k) for a few years while you are establishing the habit of saving and investing for retirement.
What are some other pieces of conventional financial wisdom that you eschew?
- Probably the biggest one for me is “credit cards are evil” and I use those suckers for almost every purchase!
- I hate the saying “Cash is King” because I think cash is dirty, finds its way quickly out of my wallet without any receipts/tracking, and loses value to inflation every day.
- One company may be famous for saying “you NEED a budget” but I don’t budget and I think I’m doing just fine “paying myself first” and spending what’s left over after saving AKA the Anti-Budget.
Hit me up with your rebellious suggestions in the comments. Thanks for reading!