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3/09/2007

Risk, Freedom, Security, and the Majority

Over at All Financial Matters, JLP has made a couple of heavily-commented posts about paying off a mortgage early vs. letting it run for its full term. (If you haven't read these posts along with all the comments, please do so! A lot of what I'm going to say relies on the context from those comments.) This is another thing that Dave Ramsey harps upon, and his followers also feel strongly about it.

I have been reading a book by Robert Kiyosaki (hear me out here) called Rich Dad's Prophecy. I borrowed it from the library, and I am not yet done with it (actually I'm only about a quarter of the way through it). I guess I will get more into Kiyosaki on a later entry, although I'll note now that I generally "drink the Kiyosaki Kool-Aid." I can't yet comment too much on this particular book, as I'm not too far into it and he seems to be making more claims than he generally does.

At the point in the book where I stopped last night, RK spends a lot of time talking about freedom vs. security. A lot of time. He can be very repetitive, although I can't really begrudge him that. Some ideas just need to be hammered away. Anyway, most of the discussion is couched in terms of retirement accounts and how most people are counting on their retirement to be secure (like the old-style defined-benefit pension plans) while they are actually nowadays more free and hence less secure (401(k)s etc. are usually invested in the stock market, leaving more choice to the individual holder, but the stock market has its inherent risks). If the supposed Social Security Reform ever goes through, this trend will just continue.

It is very clear that the majority of people will opt for security over freedom, both in the political arena and in the realm of finances. Most people are not risk-takers. They want their money invested safely. That is why they want to do things like pay off their mortgages early. And this is where I am slowly coming around to Dave Ramsey's point of view on certain things. The majority of people cannot be trusted (and cannot trust themselves) with absolute freedom. It is all too easy to ruin your life and run your finances into the ground. So many people do it all the time. So I can see why DR needs to be dogmatic about it and basically force people into having security by locking themselves into a 15-year mortgage, even though they lose the flexibility to do something else with that money.

But, there are people who have self-restraint, live well below their means, and save a lot of money without being forced to do so. I believe myself to be one of them... we'll see in 10 years where it's gotten me.

3 comments:

Golbguru said...

Hmm..I am one of those people who will seek security before freedom, but I still won't agree with trying to pay off a 15 years mortgage in 4 years. Somehow, it seems a bit foolish thing to do when the mortgage rate is less than potential return.

15 year mortgage in 4 years...why not just wait till you are 60 and just buy your house with cash if that's the way Ramsey followers look at all debt.

I think some people don't really appreciate the concept of "leverage" that is associated with certain debts...and Dave Ramsey takes full advantage of that. :)

Silverbax said...

I agree with Ramsey on a lot of his points, but I disagree somewhat on the mortgage claim. However, I also know that Dave deals with people from all walks of life - and most of them have racked up massive amounts of credit card debt, have taken out second mortgages, and have no idea why they're broke. So, yeah, he has to be strict; they just don't get it, and the rules for them have to spelled out and rigid.

I'm also risk-averse. I have a smaller portion in stocks and more in fixed investments. But I get much larger returns by putting some money into peer-to-peer lending like Prosper.com. Over the past year I've averaged 21%, with one borrower paying off early AND another defaulting. The thing about that is, your money is tied up while it's loaned out, but the return is significant. Not that I would advocate putting all one's money there; but for me, I combine it with fixed investments and about 75% of my money is in fixed or extremely low-risk investments, and I average about 10% a year. I'll take that over wild stock market swings, but that 10% is giving me 4% better than a 6% mortgage.

joe said...

Avoid RK at all costs. He really doesn't know what he's talking about. The stock market has inherent risks for stupid and short term investments (day trading = gambling). But if you invested in Vanguard's first S&P 500 index fund when it first started (1976), you would have had a return of more than 12%. Long term investing in a properly diversified investment allocation will always benefit.