Should I Pay Off My House or Start Investing?

Summary

Ramsey Everyday Millionaires: Episode Summary Title: Should I Pay Off My House or Start Investing? Release Date: December 25, 2024

---

Introduction

In this episode of Ramsey Everyday Millionaires, host Dave Ramsey addresses a common financial dilemma faced by many: whether to prioritize paying off a mortgage or to begin investing for the future. The discussion features a live caller, Richard from St. Cloud, Minnesota, seeking personalized advice on his unique financial situation.

---

Caller’s Financial Situation

Timestamp: [00:26] - [06:12]

Richard shares his current financial status:

• Debt: Only the principal balance of his house remains, amounting to $79,000.
• Investments: He has no investments but maintains a six-month emergency fund.
• Income: Receives $4,500 monthly from a combination of full-time work, Social Security disability, and transitioning to standard Social Security at age 67.
• Mortgage Details: Refinance rate at 1.875% for a 10-year term, with an expected payoff in approximately 30 months.
• Financial Goal: Deciding between paying off the mortgage in 30 months or starting to invest now.

Notable Quote:

Richard [00:26]: "I can pay off what I have remaining on my house of $79,000 in 30 months or I can start investing. What would be the point of investing if I can pay off the house? I kind of like the weight of that off of me."

---

Dave Ramsey’s Initial Advice

Timestamp: [01:03] - [03:00]

Dave Ramsey introduces the concept of compound growth, emphasizing its importance for retirement savings, especially given Richard's limited time before potential retirement. He inquires about Richard’s retirement plans and whether he has any pensions.

Key Points:

• Importance of starting to invest early to take advantage of compound growth.
• Balancing debt repayment with investment to create financial flexibility in retirement.
• Suggests considering a hybrid approach: splitting payments between paying off the house and investing simultaneously.

Notable Quote:

Dave Ramsey [01:03]: "But we also need to realize that compound growth is our best friend when it comes to our nest egg."

---

Exploring Investment vs. Mortgage Payoff

Timestamp: [03:42] - [07:47]

Richard seeks clarity on the benefits of investing versus paying off his mortgage, concerned about potential investment gains versus the peace of mind from eliminating debt.

John Deloney’s Perspective:

• Strongly advocates for paying off the mortgage first, aligning with Ramsey’s general debt-free philosophy.
• Expresses concern about relying solely on Social Security and the risks associated with having significant debt in retirement.

Dave Ramsey’s Calculations:

• Illustrates the difference between investing over seven years versus paying off the mortgage over ten.
• Shows that starting to invest earlier yields a higher return due to compound growth, but acknowledges the emotional and psychological benefits of being debt-free.

Discussion Highlights:

• Balancing Act: Ramsey encourages a balanced approach where Richard can start investing while also making additional payments on the mortgage.
• Habit Building: Emphasizes the importance of developing an investing habit early to ensure long-term financial security.
• Emergency Considerations: Acknowledges Richard’s unique situation with Social Security disability limits his ability to boost income through additional work.

Notable Quotes:

Dave Ramsey [03:42]: "I just don't want you to get stuck in this paralysis analysis mode where we don't do anything because you know, the best time to plant a tree was 20 years ago. The next best time is today."

John Deloney [05:16]: "I would not hang any hats on Social Security. At the same time, the thought of being 62 or 63 and having nobody could take my house...is a really compelling option."

Dave Ramsey [06:11]: "How much could you invest a month right now?"

Dave Ramsey [07:35]: "Dang. Well, I'd probably split the difference. I want to see you get to investing and build a habit and anything else we can throw in the house. Let's get that knocked out in the next five years."

---

Conclusion and Action Plan

Timestamp: [07:47]

Dave Ramsey concludes by reiterating the importance of starting to invest to build financial habits while also addressing mortgage debt. He advises Richard to set a clear, actionable goal that balances both investing and debt repayment over a defined timeline.

Final Advice:

• Split Strategy: Invest a portion of the income while making additional mortgage payments to reduce the debt faster.
• Set Clear Goals: Establish a timeline and specific targets for both investing and debt repayment to ensure progress in both areas.
• Future Flexibility: Once the mortgage is paid off, redirect the freed-up funds entirely into investments to accelerate wealth building.

Closing Quote:

Dave Ramsey [07:47]: "Let's set a real clear goal and get to it. My man."

---

Key Takeaways

1. Compound Growth vs. Debt Freedom: Investing early leverages compound growth, potentially resulting in greater wealth accumulation compared to solely focusing on debt repayment.
2. Balanced Approach: Combining both investing and paying off debt can provide financial flexibility and security.
3. Habit Formation: Establishing regular investment habits is critical for long-term financial health.
4. Personal Circumstances Matter: Individual situations, such as income limitations and personal preferences, play a significant role in financial decision-making.
5. Seek Professional Advice: Collaborating with financial advisors, like SmartVestor Pros, can help tailor strategies to individual needs.

---

Final Thoughts

This episode underscores the nuanced decision-making involved in personal finance. By weighing the benefits of compound growth against the security of being debt-free, listeners are encouraged to evaluate their unique financial landscapes and make informed choices that align with their long-term goals.

Transcript

[Dave Ramsey]

This episode is sponsored by SmartVestor. Connect with an investing pro for free at RamseySolutions.com invest. You're listening to Ramsey Everyday Millionaires where we talk investing, retirement, building wealth and outrageous generosity. Richard is in St. Cloud, Minnesota. Up next, what's going on? Richard?

[Richard]

Hi, thanks for taking my call. I'm in a place where I've never been before, where I have no debt other than what remains on the principal of my house. I have nothing invested, but I do have my six month emergency fund. I've spoken with a SmartVestor Pro and I'm comfortable with him. But I'm wondering, I can pay off what I have remaining on my house of 79,000 in 30 months or I can start investing. What would be the point of investing if I can pay off the house? I kind of like the weight of that off of me.

[Dave Ramsey]

That is true. But we also need to realize that compound growth is our best friend when it comes to our nest egg. And right now you don't have a lot of time between you and retirement. When are you looking to retire?

[Richard]

I like what I'm doing and as long as I can do it, I don't plan to retire.

[Dave Ramsey]

But do you have a pension or something? Let's say your body says I can.

[Richard]

Years.

[Dave Ramsey]

Okay, so at 70 years old, how are you going to pay the bills if you don't have anything invested with the Social Security? Do you know what that payment will be? Because the average payment is about 1700 bucks.

[Richard]

Well, I currently work full time, well, mostly full time. And I also receive Social Security disability and then that will switch to standard Social Security automatically at age 67. And presently between the disability and income, I have a take home of 4500amonth. My house payment is 1377. As I said, I have 79,000 principal left. I refi'd when it was in the basement. So that's at a 1.875 10 year which if I stayed on course would be paid off in 31.

[Dave Ramsey]

So here's what if you did this? What if you split the difference and you invested, you have catch up contributions you can take advantage of at this age and you began paying off the house and that way as you enter retirement, you've got one less expense by paying off the house. I don't know that we need to go full on on one of them because you're going to free up that payment if you pay it off now or you'll pay it off the next 30 months. That's about almost three years and then beyond that you'll free up a payment, you could then invest. So either way we're going to make a trade off here. But I like the plan of you getting into the habit of investing to build that muscle because for 60 years we haven't. What did your Smartvestor Pro say? I'm guessing they were on the side of investing.

[Richard]

They were on the side of investing and I would have the latitude to do a catch up contribution for 2024 up to the 8000 mark and then $8000 in 2025 as well. I guess my thought is for what? Investing for a two and a half year period and what might be built in that or may not be built in that period, but what would be off the off my shoulders as far as the mortgage for sure in that period. I'm wondering what the nominal difference would be as far as a buildup or loss or a definite payoff.

[Dave Ramsey]

Yeah, you can crunch the numbers with your Smartvestor Pro. I just don't want you to get stuck in this paralysis analysis mode where we don't do anything because you know, the best time to plant a tree was 20 years ago. The next best time is today. And so I'd rather see some action. And if that means making an extra payment a year on the house right now while aggressively investing, that's fine. And eventually if you go, hey, I got to retire soon, let's get this house paid off, we can switch gears. What do you think, John? There's not a very clear you've got to do this or this. The baby steps would say let's put 15% of our income away in retirement. Anything beyond that, let's throw at the house.

[John Deloney]

Yeah. I mean this is tough because I am probably of, of the Ramsey personalities, I'm probably the one that's most debt.

[Dave Ramsey]

Allergic like Deloney's, like, get the house paid off. Yeah.

[John Deloney]

So, dude, I, the idea of, I'm trying to think of my dad. If my dad called and said I'm going to be 63 and I could have 25,000 bucks in retirement, I've got zero dollars. And I, I've. You've probably looked up and googled the Social Security clock the same as everybody else in America and watching that sucker tick and see what's supp in 2030 and 2035. And so I would not hang any hats on Social Security. At the same time, the thought of being 62 or 63 and having nobody could take my house. Right. I can see that. For me personally Being a really compelling option. My concern is as, as George mentioned, and it sounds like you've had disability. Sounds like you, it sounds like you've had. You've been fighting some battles over the last 20, 30 years, right?

[Richard]

Yeah. Well, it's foolish. Combination of foolishness, frivolity, medical necessity with my wife who passed, and then a long term relationship recently passed. So it's now it's just me and the house is half paid off. And like I said, I've never been at this point before. Yeah. So it's, it, you know, it feels like I should get out from under it and have that for sure. 30 months on the other side, freedom as opposed to 30 months investing. And see, it feels like it would be kind of pennies of possible accumulation and investing as opposed to, you know, a real solid asset that's free.

[John Deloney]

I got, I got you on that. No, I mean, I track with you. My gut, My gut tells me the same thing. Totally get where you're at. Where you're at.

[Dave Ramsey]

How much could you invest a month right now?

[Richard]

Probably 2000.

[Dave Ramsey]

Okay, so let me do some quick number crunching for you. From 60 to 70, you invest 2,000 bucks. You would have 433 grand. Let's say you started at 63 because you wanted to get the house paid off first. Right.

[Richard]

Okay.

[Dave Ramsey]

That would then give you 250 grand. So you get a 170 grand difference there.

[John Deloney]

At what, at what year would that mature?

[Dave Ramsey]

Well, it's just compound growth over those seven years versus ten years of investing two grand. So. And again, you'd be investing more because you get free up the payments. You'd be investing three grand instead. That's 377. You still didn't catch up to those first three years of investing that then had time for compound growth to work its magic. So that's why I feel like getting started early, getting some money in there, working that muscle, getting used to investing, and then focusing on the house. You could split the difference. But either way, you've got to get investing. I don't want to rely on just Social Security to be able to pay the bills the rest of my life. And so I want you to have somewhat of a nest egg to help cushion that. With Social Security.

[John Deloney]

What do you, what do you do for a living, brother?

[Richard]

I do security. And it's, it's a good position, it's a good company, and I enjoy what I do. And it's, you know, it's, it's not going anywhere unless the place burns down pretty much.

[John Deloney]

Is there a possibility, and I'm trying to be on your team here, is there a possibility that for 18 months you could just go ba na nas, just go bananas and work extra shifts and work overtime and get this thing off your chest?

[Richard]

No, because the Social Security disability has a earnings limit, and I would need to be pulling 100 hours a week to do that.

[John Deloney]

That's right. Yeah, yeah, yeah.

[Dave Ramsey]

Dang. Well, I'd probably split the difference. I want to see you get to investing and build a habit and anything else we can throw in the house. Let's get that knocked out in the next five years. Let's set a real clear goal and get to it. My man.