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I read an article in Monetary Intelligence Magazine all about the Millionaire next door. The magazine often has articles relating to this topic. www.monetaryintel.com

[...]SmartMoney Magazine Spills the Beans Did you know most millionaires in the U.S. didn't inherit their wealth, didn't win the lottery, didn't play professional sports, didn't make it big in the stock market, and -- contrary to the late-night infomercials[...]

I guess I should be clearer on my position on mortgages. A general rule is you should put your money where it gives you the highest safe return. In my case until interest rates got down to the 6 % range, I was always going to get a sure return of whatever mortgage interest payment I avoided by paying extra, so I was making at the start 19% return and then less as the mortgage rate went down. You won't get rich by being in debt. When I was further along in my mortgage payments, I already had my first million and I was investing to the maximum in company 401K's, investing in the market on a monthly basis, and already had a very good cash reserve. I also was in the position from being a retired Military Officer of collecting a steady pension from the age of 42 that was indexed to the cost of living. So for me paying off my house rapidly was a no brainer, as I knew I did not have a better surer return for those extra payments and I did not want a mortgage in retirement. I do not believe in...(Read more of this comment) being house poor. You should not buy a home bigger than you need, as it does tie up capital, but you do need a place to live. I agree with Sam Lasley and Jamie L. I think Niko24 misses the point. I don't think any of us who have become millionaires are saying to look at your house as a bank. It is not. It is illiquid, and as he says subject to value fluctuation, but then so is the market. That is why these studies don't count your home in their value of your net worth and assume that your house is paid off. Only invest-able assets count. Not paying interest, if you can avoid it, just means you will get richer quicker. If you are investing in multiple real estate investments like a Donald Trump, then debt does help, but even Trump has lost his shirt once in awhile. That is why I prefer the market as I can get to my money any time. None of my neighbors know I am a multimillionaire either.(Show less of this comment)

To JamieL:

I know quite a few people in the NOLA and Port Arthur, TX areas who just might argue with you on the merits of paying down the mortgage, and particularly in trying to pay it down faster with extra principal payments and/or 15-year mortgage. They are either still living in FEMA trailers stemming from Katrina Rita (in 2005), or in homes but still trying to recover financially. Sure, 3 or 6 months emergency fund is nice, but when disaster strikes, it's not going to do the trick. They have ALL said they wish they would have listened to me and NOT been so focused on paying down the mortgage. They realize now they would have had access to liquid capital...THEIR liquid capital, not their FORMER capital that they gave to the bank, then had to qualify for and BORROW WITH INTEREST.

Also, the notion that 'I'll just tap my equity if I need the money' sounds great, especially during a market like we saw ~2002-2006. But gosh, are we learning (re-learning) that hom...(Read more of this comment)es can actually drop in value, and that 'equity' no longer exists? Again, I know many people who were giddy once they refi'd to a great low rate, theorizing they'd just pay down the mortgage even faster now. Well, life happens...people get hurt and can't work, lose their jobs, need large chunks of cash where an emergency fund won't cut it, etc. Just tap that HELOC, right? Perhaps...if they, A) opened one in the first place, B) haven't had it frozen by the banks. But of course even if they do access that equity, they have to pay interest to get THEIR money back. Now I'm no John Maynard Keynes, but I would say it would have been better to put that money in MY OWN account, accessible to me WHENEVER I wished, AND to have MADE money on it.

If you or anyone else chooses to pay down or completely pay off your mortgage, I say bravo. But it is folly to imply it is an endeavor without considerable risk.(Show less of this comment)

To: tomsmith2
I agree with you that it is important not to put yourself in the position of becoming 'house poor.' One must always keep a sufficient reserve of cash on hand to deal with emergencies. I would consider three to six months of expenses to be reasonable. And, I agree that the benefits of long term investments for retirement are such that it makes sense to continue to contribute even while paying a mortgage. Aside from these two conditions the faster one pays off a mortgage (or the bigger the down payment you can make) the better. Doing so reduces your risk and increases your future cash flow.

Ooops, by 'lose their house' I meant 'lose their job'. Should make my previous post a bit clearer.

To: JaimeL
Some of your points are logical, but the bottom line is that if someone has the capital to pay off their house, and they choose not to, they still have the money in case they lose their house, as you conject. By paying off a house entirely, all capital is tied up in the house. Now, if someone did lose their job, yes they could take a loan on their house to pay for bills, but now they're paying interest again. If someone keeps the capital liquid, and they lose their job, they don't need to pay any interest in order to utilize it.

On the subject of mortgages-when I first posted my comments, I mentioned an old article that looked at what it took to be rich in America. Three categories of rich were defined and each required that you have a house worth at least $500K and that it was paid off before you counted your investable assets to figure out if you had reached the minimum millionaire status and the other levels. The first level was beer and pretzels rich and it took $2.4 M. Too many people in this country think their house is an investment. In most cases it is the home they live in and if they sold it they would just have to buy another one to replace it. So if your house value goes up, unless you are moving to a smaller home or a lower cost area, you are not really going to see added wealth. In my case, I made a concious effort to pay mine off early before I retired, so I wouldn't have to pay a mortage in retirement. Getting a tax break is nice, but saving on total interest payed is nicer. I paid off a 30 yea...(Read more of this comment)r mortgage in 7 years. I had bought the home when interest rates were 19%, so I just kept making extra payments when rates came down eventually to 6 1/4 %. Having a mortage may be a good idea if it is truely investment property, not your personal home. My house is worth over $1M, but so what. I am living in it and can't access that cash in a ready fashion. That is why my wealth was made by wise investments in the market, and paying myself first before I spent my salary. I lived well below my means. I used to make car payments, but when my car payment was over I just kept driving the car and putting tghe money away until I could buy one for cash. It is the way most people become millionaires, not by spending their money on depreciable assets or putting it all in their home. My money is instantly available to me. I have enough money in cash accounts to live for a year or more without ever touching my stocks, bonds and mutual funds. My total worth does go up and down with the market, but no one is knocking on my door to take my home away, and I have enough money to live out the rest of my life in comfort.(Show less of this comment)

To: tomsmith2
Since the the purpose of diversification is to reduce risk, lets not be too clever by half here. If you have the means to pay off your home completely, you should do so. Yes, you will have to pay the IRS more in taxes but you will have to pay the bank much less in interest payments so the result is a net positive. With the mortgage finished (and no additional interest to pay) there is plenty of cash flow to buy into additional diversification plans. The risk that a life event (death or disability of spouse, loss of job, medical emergency) will cause a person who is nursing their mortgage along in the name of 'diversification' or 'tax shelter' to loose their home is much more likely and far more personally devastating than loosing some equity because the housing market turned.

@miltkim:

Your analysis of a mortgages ignores a few important points:

1) By not paying off the entire mortgage at once (assuming an individual had the capital to do so), an individual can diversify his capital with other investments as well as having an equity in his or her/house.

2) The 35% mortgage interest write-off is money he can spend use to further diversify his investments in order to further strengthen his / her portfolio.

All other things being equal, dumping all your capital into your house is a bad diversification strategy and is certainly subject to the negative market conditions that everyone is experiencing.

Good information. I'm a little baffled when a financial advisors says he is in good shape with a $900K mortgage because he gets great deductions. I would be more impressed if he owned the house free and clear and was not paying a bank interest for something they could take if his fortunes turned and he could not sell it. Instead he's happy getting 35% refund from the IRS.

I to would like to retire early. I like the first poster said it right. He basically said you are not a POND to someone else. I have done well, but would have about 60K in income if I retire. That's more than I take home now. It seems most of my money goes to 401K's, Roth's etc. I live on only $2K a month now. As you get older in business, it seems the jerks get ahead faster. Go figure.

I remember the article years ago in Barron's that looked at what it took to be rich- you had to have a home worth at least $500K and PAID OFF, and not count it in your investable assets.

I was surprised by the new study as to how well it fit me except for a not paying off my house (mine is paid off) and current income over $300K per year - I no longer work and my income is below that, but I have NO debt. I do have over $2.4M not counting my house nor the present value of my pensions. Pretty much everything else fits. My wife and I don't feel rich. We don't own a California McMansion, but something more upper middle class. I once thought you can never have too much money, but I realized you can have enough, so I retired, as time was more important to me than money. I decided I didn't need to buy any more luxury cars as our two Mercedes were still way short of 100K miles and were paid for, and I don't drive to work any more. In general we do not believe in debt, using our credi...(Read more of this comment)t cards for the float and convience and yes points. If I can't pay cash for it, I don't put it on the card.

Am I happy, you bet I am. Did I work hard to get where I am, yes I did and it was more complicated for me because I spent 21 years in the AF for the fun of it, but it did not make me rich. I essentially started over at 42 with almost no assets. Living below my means, and some lucky stock market picks made me my first million about 10- 15 years ago, and it just continued to grow. Knowing you will not outlive your nest egg and having the money to do what ever you like makes it all worth it, especially since I have my health, which is more important than the money any way. The money allows you to spend your time as you want, not as others direct you.(Show less of this comment)

Ahhh happiness, so easily pointed at; impossible to own. Are the rich really happier? Let's see. Happiness is contentment with what one has. If they were trully happy what else would they need? Their limited happiness comes from the freedom to do what they think they want to do. It does NOT take any amount of money to be happy to be alive, in fact it takes losing all your stuff for you to realize what you always had. For free. The article points to this 'obsession with accumulation' by saying 'you can always be happier with more money.' Is that really true, isnt happiness a state of being not a rule of measure? So no matter how many baubbles you buy you will never be really happy until you find your true value as a living being. Then, whatever happens is secondary and not contingent upon any temporary thing, like wealth.