This Is the Biggest Piece of Mythology in Personal Finance

Summary

Ramsey Everyday Millionaires: "This Is the Biggest Piece of Mythology in Personal Finance"

Release Date: January 17, 2025
Host/Author: Ramsey Network
Participants: Dave Ramsey, George Kamel, Rachel Cruze

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Introduction

In the January 17, 2025 episode of Ramsey Everyday Millionaires, hosted by the Ramsey Network, the discussion centers around debunking a pervasive myth in personal finance: the misconception surrounding mortgage interest deductions. Featuring insights from Rachel Cruze and George Kamel, the episode dismantles common misunderstandings that hinder individuals from making financially sound decisions, particularly regarding paying off mortgages early versus leveraging tax deductions.

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Listener's Question: To Pay Off Mortgage or Not?

[00:22 - 01:09]

George Kamel introduces a listener question from Jamie in Minnesota:

• Situation:
  • Age: 51 and 53
  • Financial Status: Debt-free with three fully paid cars
  • Household Income: $150,000
  • Mortgage: $90,000 remaining, to be paid off in one year if an additional $50,000 from selling a car is applied, or in three years if not.
• Dilemma:
  • Pro Seller's Perspective: Pay off the mortgage early by selling a car.
  • Pro Holder's Perspective (Husband): Avoid paying off the mortgage early to retain the tax deduction on mortgage interest and prevent potential IRS liabilities, citing a mortgage interest payment of approximately $3,097.66 last year.

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Rachel Cruze Debunks the Mortgage Deduction Myth

[01:09 - 08:52]

Rachel Cruze addresses Jamie's concern by labeling the reliance on mortgage interest deductions as "the biggest piece of mythology in all of personal finance." Her comprehensive breakdown includes:

1. Understanding Itemized Deductions:

   • Standard vs. Itemized Deduction:
     • Standard Deduction: Increased significantly under the Trump administration, leading 91% of Americans not to itemize.
     • Itemizing: Only 9% of taxpayers itemize deductions, meaning the majority do not benefit from mortgage interest deductions.
   • Implication: If Jamie and her husband do not itemize, they do not receive the mortgage interest deduction, rendering the husband's argument moot.

2. Tax Savings Misconception:

   • Clarification:
     • Mortgage Interest Deduction vs. Tax Credit: The mortgage interest deduction reduces taxable income, not taxes owed directly.
     • Calculation Example:
       • Mortgage Interest Paid: ~$3,100
       • Tax Rate: 32%
       • Tax Savings: ~$1,000 (i.e., $3,100 * 32%)
   • Conclusion:
     • Net Impact: Selling the car to pay off the mortgage results in saving $3,100 in interest while only saving $1,000 in taxes, making it a "dumb trade" (Timestamp: [03:00]).

3. Critique of Professional Advice:

   • Tax Preparers' Flaws:
     • Some tax professionals erroneously advise against paying off mortgages early, suggesting strategies like unnecessary expense inflations to maximize deductions.
     • Rachel's Stance:
       • Such advice is "asinine" and demonstrates a lack of understanding of basic financial mathematics.
       • She advises listeners to "fire" tax professionals who propagate these myths.

4. Current Tax Landscape:

   • Trump Tax Code Impact:
     • The standard deduction was raised, simplifying tax filings for most and further reducing the relevance of itemizing.
   • Practical Implications:
     • Standard Deduction Supremacy: For the majority, especially like Jamie and her husband, taking the standard deduction is more beneficial, making mortgage interest deductions irrelevant.

5. Millionaires' Financial Strategies:

   • Empirical Data:
     • Rachel emphasizes that among 10,000 millionaires studied, none became wealthy by avoiding mortgage payoff to invest in the market.
     • Millionaires' Approach: Prioritize paying off mortgages early as part of disciplined financial management.

6. Final Recommendations:

   • Pay Off the Mortgage: Encourage listeners to eliminate mortgage debt swiftly, highlighting the mathematical and financial sense in doing so.
   • Choose Reliable Tax Professionals:
     • Advocate for using tax advisors affiliated with Ramsey Solutions who understand and implement sound financial principles.

Notable Quotes:

• "The mortgage or the tax deduction in general... is the biggest piece of mythology in all of personal finance because it requires that people forget how to do sixth grade math." — Rachel Cruze [01:09]

• "You're trading dollars for quarters. Dumb trade." — Rachel Cruze [03:00]

• "None of the millionaires... became a millionaire by not paying off my house and investing the difference into the market." — Rachel Cruze [08:10]

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Key Insights and Takeaways

1. Misconception of Tax Benefits:

   • Relying on mortgage interest deductions is largely ineffective for the vast majority, as most taxpayers do not itemize deductions.

2. Financial Efficiency:

   • Paying off the mortgage early is more financially advantageous than holding onto debt for marginal tax savings.

3. Critical Evaluation of Advice:

   • It's essential to scrutinize financial advice, especially that which contradicts fundamental mathematical logic.

4. Wealth Building Practices:

   • Millionaires focus on debt elimination and disciplined financial planning rather than leveraging minimal tax benefits.

5. Tax Filing Simplification:

   • The enhanced standard deduction has simplified taxation, reducing the need for complex itemization and associated myths.

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Conclusion

The episode robustly challenges the entrenched belief that maintaining a mortgage for tax deductions is beneficial. Rachel Cruze's detailed analysis underscores the importance of understanding tax mechanics and prioritizing debt-free living. By dispelling myths and advocating for informed financial decisions, Ramsey Everyday Millionaires empowers listeners to build and sustain wealth through disciplined, logical strategies.

For more insights on investing and wealth building, visit ramseysolutions.com/investing.

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Note: This summary excludes introductions, advertisements, and non-content segments to focus solely on the core discussions and valuable insights presented in the episode.

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.

[George Kamel]

Today's question comes from Jamie in Minnesota. She said, my husband and I are 51 and 53. We're debt free and have three cars that are fully paid for with household income of 150, $50,000. We are debating whether or not we should sell one of our cars worth $50,000 and apply that to our mortgage. We owe about 90,000 on our mortgage and will be paid off in one year if we sell the car versus three years if we do not sell the car. My husband thinks you should not pay off your house early because we can't deduct the mortgage interest on the tax returns and he's afraid we'll owe the IRS. Last year, we paid $3,097.66 in mortgage interest. Can you provide some feedback on that and what your recommendations are?

[Rachel Cruze]

Okay, well, the mortgage or the tax deduction in general, including mortgage interest, is the biggest piece of mythology in all of personal finance because it requires that people forget how to do sixth grade math. Let me walk you through it. If, Jamie, if you actually itemize, then you can claim your charitable deductions and your mortgage interest rates, by the way, last year, because the standard deductions are so high, almost no one itemized, including you, you probably didn't even itemize. So your husband is completely unaware of how this whole thing works because you didn't take a deduction for your mortgage interest unless you itemized. 9% of Americans itemize, 91% do not. If you do not itemize, you do not get a tax deduction for your charitable or for your interest. So 91% of the people, this doesn't even come up with.

[George Kamel]

Right.

[Rachel Cruze]

So that's just dumb. Not you, not you, Jamie. But when people are saying, well, I didn't want to lose my. You're not taking it anyway. You just don't even know how your taxes work. You're that, gee, plug into it all right? Now, if, if you do, if you did itemize, then you sent the mortgage company $3,000, $3,097, 3,100 bucks. And that reduced your income, your $150,000 income by $3,000. A tax deduction is not a tax credit. It lowers the amount of income that is taxed. So the tax savings is not $3,100. The tax savings is $3,100 times your tax rate, which is 32% in your case. Okay? And so you saved $1,000 in taxes if you itemized. So here's how this works. Your husband is suggesting, absurdly, that you send the government $3,100 or you send the mortgage company $3,100 to keep from sending the government $1,000. You're trading dollars for quarters. Dumb trade. So always pay off your mortgage, never keep it for the tax deduction. If you send somebody $10,000 to keep from sending the government $3,000, by definition, that's mathematically stupid. And then I call myself sophisticated because I didn't pay off my mortgage because I had the tax deduction. But I don't even take the tax deduction because I'm not even one of the people that itemized. And I just didn't even know that with this opinion around the Thanksgiving table, they're just absolutely do not know how to do math. And they don't know the reality of the situation. Now, worse than that. Worse than your broke brother in law telling you this at Thanksgiving. You're silly. Dave Ramsey doesn't. Worse than him, the one that pisses me off to no end, are people that do taxes for a living. And, and they tell the small business person, or they tell you to not pay off your mortgage because you'll lose the tax deduction or to run your expenses up on things you don't need to buy. You need to spend some money by the end of the year, otherwise you're going to get taxes. Well, that is asinine. It's ridiculous. You own a hair care place and you spend 10,000 bucks. You don't need to spend because your tax preparer is a moron. Who told you to do that? That's dumb. Let me help you. You got two words for these people that give you that advice. You're fired.

[George Kamel]

The tax write off. It's like the Schitt's Creek episode where he's like, well, just. It's. It's a write off. And he's like, yeah, but who's writing it off? He's like, I don't know. The write off people. It just gets written off. It's like this like mystical idea of the tax write off.

[Rachel Cruze]

Like it is like it justifies almost always.

[George Kamel]

It's like, well, I don't know. It's the tax write off.

[Rachel Cruze]

It's a write off.

[George Kamel]

Well, who's gonna pay for, I don't know, write off people?

[Rachel Cruze]

That's great. I've seen that episode. So listen, if your tax person is telling you to run up your expenses or to not pay off debt because you're getting a tax deduction, they're telling you to trade dollars for quarters. You don't need someone that can't add doing your taxes. You need new tax people. Go to ramseysolutions.com and get with one of our tax people. They do not make this mistake. Believe me, we wouldn't. They would not have a Ramsey trusted sign on their door if they made this mistake. Because they wouldn't be trusted by me. Because I don't trust people that can't do math. So there you go. That's what we're doing here. So, guys, whatever you do, don't fall for the tax deduction myth. And the irony of ironies is all of these people discussing it. 91% don't itemize in America today. That's everybody, y'all. I mean, so.

[George Kamel]

Because you. Because for majority of people, you get a better deal if you just take the standard deduction anyways.

[Rachel Cruze]

That's what I mean.

[George Kamel]

Yeah.

[Rachel Cruze]

That's why you don't. They don't need to.

[George Kamel]

Items you don't need to because. Yeah. You're stupid.

[Rachel Cruze]

Actually, under the, under the Trump tax code in his last administration, he ran the standard deduction way up.

[George Kamel]

Yeah.

[Rachel Cruze]

You get an automatic deduction just because you breathe.

[George Kamel]

Yep.

[Rachel Cruze]

And your real deductions don't add up to that. So you're better off to take the big one.

[George Kamel]

Right, right.

[Rachel Cruze]

The breath, the breathing deduction.

[George Kamel]

Yes.

[Rachel Cruze]

From the write off people.

[George Kamel]

That's right. But they're there.

[Rachel Cruze]

That's. The standard deduction has changed the game and it's made the tax filings very easy.

[George Kamel]

And that's probably up to more. In the last, what, 10 years. In the last, what, 10 years?

[Rachel Cruze]

15 years ago, if I was talking about this, it had been 70% because.

[George Kamel]

This was a main. Back in the day at our live events, back in 20, you know, 2004, this was a big discussion and now it's not. You don't hear it as much in.

[Rachel Cruze]

Your life because the standard deduction was raised and the number of people therefore that don't itemize is so few.

[George Kamel]

Yes.

[Rachel Cruze]

So it was absurd back then because you're trading dollars for quarters. And we used to cover it in the live events in those old arena events.

[George Kamel]

That's right. That's right.

[Rachel Cruze]

And it was absurd back then. It's just as absurd now for the same reason. But it's doubly absurd because it really doesn't apply to hardly anybody anymore.

[George Kamel]

Yeah.

[Rachel Cruze]

And I'll bet you money Jamie doesn't itemize.

[George Kamel]

Yeah.

[Rachel Cruze]

91%.

[George Kamel]

Yeah.

[Rachel Cruze]

And so it doesn't even come up. So her husband's arguing a theory that he's not even doing and then if he was doing it, he's trading dollars for quarters.

[George Kamel]

Yes.

[Rachel Cruze]

So don't trade dollars for quarters. Pay off your mortgage.

[George Kamel]

And the other, the other argument for not paying off the mortgage is I can make more in the markets versus what I'm paying in interest.

[Rachel Cruze]

Yeah. Said no millionaires ever.

[George Kamel]

Right.

[Rachel Cruze]

The millionaires that we, the 10,000 millionaires that we studied, none of them. Precisely zero. Said I became a millionaire by not paying off my house and investing the difference into the market. None of them say that. It's always broke people that say this stuff. The broke people that don't want to lean in and do the smart long term financial plays like getting your home paid off.

[George Kamel]

Yep.

[Rachel Cruze]

So yeah, it's asinine, you guys. The data just does not back it up. The math does not back it up. Pay off your house people. When you get to baby step six, finish the baby steps and pay it off. And don't deal with tax people that can't add. Please God.

[Dave Ramsey]

Thanks for tuning in to Ramsey Everyday Millionaires. To learn more about investing, visit ramseysolutions.com investing or click the link in the show notes. Ramsey Solutions is a paid non client promoter of participating pros. Learn [e-mail].