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.

Listening to podcasts on the train

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!)

My home of 13.5+ years

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).

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Get into the habit of saving before trying to optimize for taxes. Photo by Serpstat on Pexels.com

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!

  1. We never budgeted and we have done fine. I think you can go against the grain and still succeed as long as you do the main thing, live on less than you earn and invest the rest. If you mess that one up, you are not going to win.

  2. I think you and I have very similar money mindsets. Cash flows out of my wallet like water, and I definitely put some of my IRA money in the traditional bucket for the “now” money.

    Still don’t know what we are doing with our mortgage, but an early payoff isn’t top priority for now.

    1. I have a Roth option in my 457, so I will probably slowly work towards shifting some (50%?) to the after-tax option. It’s interesting how the more money I make, the less of it I need NOW. I fear that’s not the case for most people.

      1. hey man. you don’t know me but i had the same roth option in a work 401k and i split my contributions for a year or two thinking the same thing. here’s a word of caution from a stranger: it was pretty confusing in the account which dollars were designated roth and which were pre-tax. also, another great roth benefit for early retirees is that you can withdraw principal from a roth (but not gains) at any time without penalty at any age. i’m not sure it’s so easy inside a 457. i’m just saying you might want to check on that before you take the plunge. the external roth in a brokerage is so much more simple and straightforward and now with no trading fees it’s cheap too.

        that’s just my experience. your mileage may vary. rock on.

      2. Thanks for that head’s up. I had wondered about that “mix” issue inside an account, and I’m already not thrilled by the account/provider.

  3. We didn’t have an emergency fund the entire time we were paying off debt. I wanted that money to go to debt, and our payments were guaranteed as disability and unemployment. It didn’t make sense to keep taking money out of the EF ((er had a ton of unexpected medical expenses) only to have to find it again the following month. Why not cut out the middle man and throw everything at debt?

  4. I meant to leave this comment at least a dozen times…yes to the cash thing! I took $20 cash out of the bank on Friday. I can only account where $5 of it went and NONE of it is in my wallet. Why am I this way, Josh? WHY? 😀

    1. I don’t know, but it means I’m in good company!!! 😁 The whole idea of putting all of your money in envelopes to spend blows my mind. I’d be out of money in the first 4 days of the month! 😂 And have no idea where it went!

  5. I so agree with the cash comment among many other points you make here. Cash will fly out of my wallet soooo easily. And I did had to get to a level of financially knowledge that allowed me to use credit cards again for their benefit. There was a point in my life they had no place in my wallet.

  6. There are a lot of finance rules of thumb that don’t necessarily work for your individual situation. We never had an emergency fund and instead kept a home equity line open at all times — debt instead of the rainy day fund! We put everything on credit cards for the tracking feature (though we pay these off). We don’t prepay mortgages b/c these are the cheapest debt we can get, and for our rentals these are a business expense, and finally liquid cash is more valuable than a paid off property. Finally, I actually had too much of a focus on saving and had to learn how to spend and live more in the moment.

  7. So many, Josh!

    -No health insurance for a while
    -An emergency fund would have felt laughable as a low-income person
    -Also not a big budgeter. I’d love to know why so many PF bloggers don’t budget, and yet we tell readers to do it…

    I also know another blogger who takes out big lines of credit to put into a high-yield savings account to collect the interest. She seemed to have a system down for it.

    The Roth thing makes sense mathematically, but for me the huge advantage is the ability to withdraw the contributions before the Traditional. To me, that’s the value about it.

  8. You’re so right about the importance of psychology and motivation. I have spent years trying to focus on eliminating the higher interest credit card debt and it is just Sisyphean. Yet I just realized that the fixed payments on my lower interest debt, especially as they mature and the amortization works in my favor, make repayment so satisfying as I watch significant changes in our net worth each month. I am now paying more to them to swiftly reduce principal, even at the expense (literally) of the credit card debt in the short term. Stupid move? Mathematically, yes. But I spent years feeling stuck trying to pay off high interest debt, and now have hope when I see the overall numbers change in my favor. For many of us, debt is a portfolio and you should look at it holistically.

    So I love your way of looking at this.

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