Recently, two commenters disagreed strongly in a thread about 15 year versus 30 year mortgages. I thought they both made a worthwhile point in a way because they are both looking at risk, but in completely different ways.
Tristan wrote first:
No Mortgage=No Risk=No interest payments=you work for yourself not the bank.
Debt is never good. It’s enslavement. There is no true advantage to keeping debt.
This was followed by John:
“No mortgage = no risk” is absolutely, 100%, false. It’s actually possibly RISKIER than the stock market (with proper diversification). Because you’re tying up a huge portion of your money in a single investment, you could lose a huge portion of your money if that investment should decline in value for whatever reason. Yes, it’s less volatile than the stock market. But it’s not necessarily less risky. A lot of people are finally figuring that out in the current housing slump. A house is an investment and carries risk like any other investment. I’m worried that you aren’t evaluating risk properly, which could make you vulnerable.
You know what? They’re both right, but they’re both focused on different aspects of risk.
Tristan is focused on personal risk. If you have a debt on an item, that’s a risk – you risk foreclosure, repossession, or damaged credit if you can’t repay. Eliminating that debt largely eliminates that risk. Thus, in terms of direct threat to one’s way of life, debt itself is a risk.
John is focused on investment risk. Owning any asset with notable value is an investment risk, whether it be a home, a stock, a bond – anything. John sees that houses have investment risk just like stocks do, something that a lot of people seem to have forgotten recently as the housing market went bonkers. It’s also a risk from an investment perspective to have a significant part of your investment in one asset.
Tristan’s perspective is the Dave Ramsey perspective. The most important thing is to ensure that your personal ship is righted and you’re not in significant danger of debt swallowing you whole. Pay off all debts above all else, then worry about investing. This way, if something bad happens in your life, you don’t have repossession issues.
John’s perspective is the investor perspective (I was tempted to call it the Robert Kiyosaki perspective, but that’s wholly unfair description in some ways). He sees a house as an investment and sees the housing market having some serious issues, so he would not want to own a house as an investment.
Most likely, Tristan and John are in two completely different financial states and are looking at the risk that applies to that state. I’m betting Tristan has some significant debt load and is diligently trying to pay it off because he doesn’t have a large social safety net. I’d also bet that John has some experience with investing and probably has a larger net worth than Tristan, but is also older and has had more time to build it.
These two views on risk cause a strong disagreement, and it happens more often than you think. For example, in the recent debate about personal comfort and investment strategies, I am looking mostly at the personal comfort risk if an investment disrupts your personal comfort, get out of that investment because stress and lack of sleep are unhealthy physically and psychologically. Meanwhile, a lot of readers are looking primarily at the investment risk – bailing out when the market is sliding can be very financially risky. Which risk is more important? We could yell at each other all day about it and not really change each other’s minds. It depends on who you are.
What’s the point? Risk comes in a lot of different forms, and different forms of that risk monster scare different people. Any financial move you make has several aspects of risk to it. The key is to find the moves that have the least risk for you, and I think for Tristan and John, those moves in terms of a mortgage would be very different.
Personal finance is fun, isn’t it?