Many folks know of Rick Edelman. Noted financial advisor, owner of Edelman Financial, author of numerous books on finance (investing, saving, homes, etc.), he runs seminars all over the US, and hosts a weekly 2-hour radio talk show. His book “The Truth about Money” has been a bible for many people in the US, as they seek to decipher the labyrinth of their money. For many folks, Ric is the voice of financial planning.
Like most financial advice, it is difficult to get too general in the rules of finance, and you often need to get a lot of an individual’s specific details to give accurate advice (something that Ric and his team say many times on their radio shows). Still, in his book, Ric does offer some advice that, while it might work for most folks in the world, does not match what I think works (and I think many in our FI community would agree).
In the real estate section of the book (that I was reading last night), Ric calls for you to:
- Pay as low a down payment as possible on your home and get as large a mortgage as you can(leave your remaining cash for investment)
- Go for the longest mortgage period possible (30 years+)
- Don’t make extra mortgage payments or pay bi-weekly, i.e. don’t pay your debt off sooner
- Don’t work on becoming debt free with no mortgage (rates are low, invest that money, use mortgage deduction to reduce taxes).
Some of his points to this are that if you pay your house off, it’s not liquid; you can’t sell portions of it to pay bills. You also don’t have flexibility if you want to move – you’ll have to sell the house (or rent it out, which can be a pain). Home price increases often merely track inflation, so you won’t gain there. Finally, a home will continue to cost you money (repairs, decorating, etc.). It is not an investment, and should not be considered one.
I have the same problem with him here that I do with folks that criticize Dave Ramsey’s debt snowball (“you should be paying off the highest rate credit card, not the one with the lowest balance”) – while the numbers are correct and make complete sense, it doesn’t take into account human psychology. We are emotional beings, not Mr. Spock, so we need to understand how keeping a mortgage forces us to behave & think, versus being debt free.
For many folks in the FI community, the path to financial independence is reached by keeping a close eye on their expenses, and finding ways to reduce these costs. Once we get our spending under control, we work to hit that 25X / 4% amount in order to achieve our freedom. Since Ric’s books says that 40% of a person’s spending is going into their home (mortgage, rent, taxes, utilities, furniture, etc.), by reducing this number, it suddenly opens up a big lead in our race to FI.
It wasn’t until Mrs. 39 Months and I paid off mortgage that I caught the FIRE bug. It suddenly seemed possible. When Mrs. 39 Months lost her job, we were just finishing up paying off the mortgage. She told me she felt much less stress about her job loss, knowing that we had the home paid off.
We all saw the possible disaster that could befall you if you followed Ric’s advice completely. We suffered a major crash (2008/2009) with job losses and a dramatic drop in home prices. There are a lot of folks with the huge mortgage that is “smart” that, when the market’s crashed 50% and they lost their job, were in a terrible spot. Don’t tell us “this could never happen” – we saw it happen.
For most folks who are ok being on the treadmill, who are fine with getting the large mortgage and house and paying it off over 30 years while saving for a retirement in their 60s, Ric’s ideas work. For those of us in the FIRE community, who want to get our independence early, the idea of tying ourselves down to a huge mortgage for the next 30 years really doesn’t look that “smart.”
Mr. 39 Months