Was I Really Listening? A Debt Discussion
I was having a conversation recently with new clients, let’s call them John and Sally. John shared that he was preparing to receive a lump sum of money from the pending purchase of his employer by another company and the stock he owned was being purchased. (It does not really matter if John was selling a house, or a business, or winning the lottery). Since the cash was not needed for other financial needs, John wanted to know my thoughts on paying down or paying off the mortgage on his family home. Seems simple enough, no more debt, mortgage payments, etc. Perhaps, however, there was more to the question than meets the eye? Sally was also pretty curious about both the question and the answer.
So as any good planner does, I asked John and Sally some additional questions. John said he really did not like debt and would like to ultimately pay off his house mortgage. Sally agreed, but was interested in alternatives. I said to them, “There are of course several reasons why you might and might not want to do this.” “Tell me more,” said John.
“Can you afford the monthly payment?” Knowing the answer, I of course was setting him up a little bit. John has a good job, and is well paid. He of course said that he could. He likes what he is doing and will continue to work for some time. So this is not the whole answer.
I asked them a bit more about the mortgage; current balance, interest rate, and how many years were remaining on the mortgage. The interest rate was low, and a fair number of years to go. “You know that you get a tax deduction for the interest you pay on the mortgage, and of course if the increase in the value of your home as a percentage of the current value exceeds the after-tax rate on your mortgage, then the real cost of the mortgage except for maintenance, insurance, and other expenses, is actually not costing you much, if anything.” And…off I went sharing my technical expertise. But, I was missing the point. Why? I was not listening.
I realized after the glossiness in their eyes appeared, or perhaps boredom had set in, that I needed to head in a different direction.
Was I really listening? Were they truly asking for permission to pay off the mortgage? What was really going on? These are smart folks, so there must be something else I had yet to uncover. After a bit more discussion what John was really telling me was “I would like to pay down the mortgage so I can possibly take another job that is more rewarding but might pay me less money, and therefore I would not need as much cash on a monthly basis.” Wow! Now I was beginning to listen, and hear.
Maybe this was good to know before the mortgage dissertation? What we are solving are at least two questions. How do you feel about debt and what is debt preventing you from doing? Many people would like to not have debt, but we also know that debt allows us to accomplish things we would not be able to do otherwise. Using cheap debt to finance an appreciating asset is usually a good thing. But debt can also prevent us from realizing what might be very important to us, such as changing careers, pursuing something more meaningful or less stressful, or in a different (warmer) climate. (Word has it Minnesota can get cold).
So instead of “running the numbers” or talking about interest deductions, perhaps I should be listening for what is truly important. After all, isn’t this where our true value as wealth advisors resides?
Sam Rouman, CFP®, CLU, ChFC, AIF®m is a certified planner and wealth advisor at the firm’s Minneapolis office. He enjoys the opportunity to work directly with clients to help them make good decisions about preserving, building, and managing their wealth.
When Sam is at home, you will likely find him spending time with family and friends, outside working on his latest landscaping project or hitting the links. In the winter months, he is an avid skier with Salt Lake City, Utah topping the list of his favorite ski destinations.