For the last month or so, the PF-o-sphere has been all atwitter with the story of Sean Cooper.
I’m sure you’ve heard about it by now, but if not, let me give you the 411. After buying a house in 2012, Cooper decided he hated mortgages more than your author hates pants. So he dedicated what seems to be every waking hour towards the goal of stomping out his debt. He worked 100-hour weeks, splitting time between his day job as a pension analyst and various evening and weekend gigs like freelance writing and stocking meat at a grocery store. Alas, it does not appear Sean ever tried to sell his body. IT’S LIKE HE’S NOT EVEN TRYING.
A couple of months ago Cooper finally succeeded paying off his mortgage, and celebrated by throwing a mortgage burning party at a Toronto restaurant, a party where I can pretty safely assume everyone paid their own way. (Edit: turns out they didn’t. WAY TO BLOW MY NARRATIVE, COOPER.)
In various media interviews afterwards, Cooper explained how he managed to eradicate a $255,000 debt in three short years. Not only did he work his ass off, he also lived like a broke college student. He eats for $100 per month, calling Kraft Dinner his “best friend.” He has no car, choosing to ride his bike and take the bus everywhere. He cut his living costs down to practically nothing by living in the basement of his house while renting out the upstairs.
Related: Robb from Boomer and Echo has his thoughts about what Cooper really accomplished by paying off his mortgage so early. As always, it’s worth your time.
These sacrifices, combined with his almost 1%-esque income, put Cooper in a position where he could save close to $100,000 per year. He channeled those savings into the mortgage, and the rest is history.
What I find much more interesting is what happened once Cooper went public with his accomplishment. His story went viral, leading to articles being written about him on CBC, the Globe and Mail, and Daily Mail’s websites. He was also interviewed on CBC television, and probably other places I’m missing.
After a while, the story shifted from “area man lives like hobo to pay down mortgage” to “people are pissed at area man for paying off his mortgage so early”. Internet commenters (who Cooper dismissed at “jealous haters”), had pretty much three major arguments against Cooper’s plan. Let me summarize them with far fewer swear words.
- Cooper missed out on life by cutting out just about everything to pay down the mortgage
- By the time the mortgage was paid off, Cooper had about 80% of his net worth concentrated in a house in Toronto (actually Scarborough, AKA Toronto’s armpit)
- Cooper could have done better by investing that money into the stock market
I’m not going to spend much time talking about point one, because hey, if Sean wants to live in a basement and spend all his waking hours working, more power to him. The kind of people with enough time to kill to comment on internet blogs probably value free time highly, while Sean seems to view it as a waste. Different strokes, different folks.
The other two arguments are quite valid. Let’s explore them both in more detail.
Is 80% too much concentration in one asset?
Sean outlines his net worth periodically over at the Million Dollar Journey blog. This is his latest update from the beginning of November. You’re probably too lazy to click, so here’s a screenshot:
Right away, from a traditional financial planning perspective, we can see some issues. Cooper has done a pretty good job maximizing his RRSP contributions, but has barely stashed away anything in a TFSA.
Garth Turner likes the advice that having 100 minus your age is an appropriate percentage of your net worth to have in real estate. On that metric, Cooper should have 70% of his net worth in his house, which isn’t much off the 80% he currently has.
But I’m not sure the traditional metrics apply here. The average 30-year old is just beginning their home buying journey. That rule of thumb is intended for the guy with a $50,000 down payment and a mortgage, not for a guy with a fully paid off house.
It’s not the end of the world at this point, since he can take the money he was plowing into the mortgage and use it to diversify into other investments.
There’s also the Toronto housing bubble to think about. In 1989, the average price for a Toronto house peaked at $273,698. In 1996, prices bottomed out at $198,150, for a total contraction of 27.6% before inflation. There’s risk other forms of investment could do the same thing, but a diverse portfolio decreases those chances dramatically. After all, that’s the whole point of diversifying.
During an interview, Cooper doesn’t seem to care about his lack of diversification. He told The Daily Mail “People say that I could have used the money to invest and gotten a better return – but if you lose your job, you can stop investing. You can’t stop paying your mortgage.”
That’s true, but at the same time, Cooper already has a built-in hedge against losing his job. By renting out the upstairs at his place, he already had a fall back income source to cover him if his boss booted his ass to the curb. And even if he lost his day job, he was still making $30,000 to $60,000 per year freelancing.
Maybe Cooper’s arguments stack up for the average Joe who has 100% of his income coming from his day job, but they don’t really apply to his own personal situation. Sean Cooper has the kind of security most people can only dream about. Which makes it a little odd he was so worried about paying down debt.
How about investing it?
On the surface, it looks like Sean did really well on his house. He paid $420,000 for it three years ago, and he figures it’s worth $550,000 today, a valuation I’d say is reasonable. That’s a return of approximately 8% per year, plus what he generated in income by renting out the upstairs.
But we can’t look at it that way, because the house would have gone up in value independent of what Cooper did.
We have to make some assumptions to see whether Sean would have done better if he would have invested the cash. So let’s build him a simple model portfolio.
He paid off $255,000 in mortgage debt in three years. Let’s assume $15,000 of that was the normal schedule, leaving him with $240,000 in extra payments. Thus, we’ll assume he would have invested $80,000 per year.
He kept his (imaginary) portfolio simple, buying three ETFs in equal amounts each month. He owned XIU.TO (the TSX 60 ETF), XSP.TO (the S&P 500 ETF) and XBB.TO (the bond ETF). Assuming equal monthly contributions to each, he would have put $2,222 into each ETF on a monthly basis. We’ll assume dividends get reinvested and ignore trading costs, taxes, and other such noise.
We’ll assume he started in September 2012 and ended in August 2015, which means he made 36 equal contributions to his investment account. You can view the spreadsheet here that does all the heavy lifting.
The summary is this. If Cooper would have invested his $240,000 over three years, he would have ended up with $262,882.79. Meaning, he would have gained a little less than 10% on the value of his investments over three years.
To be honest, that’s not very exciting. A return of a little more than 3% per year means Cooper probably made the right choice by choosing to pay down his mortgage. There’s no tax consequences for paying down his mortgage. These investments would have generated dividends that would have been taxed. Even if investing would have won out on a strictly numbers basis, the fact is any money invested is money risked. Advantage, mortgage.
But that’s a very short-sighted way to look at things. Stock market returns fluctuate wildly over the short-term. These last three years haven’t been that good for investors in Canada. It wasn’t as though Cooper made an intelligent choice to avoid investing because he thought returns wouldn’t be good. He just decided to pay down his mortgage. If we extend the exercise out for 10, 20, or 30 years, we’re just about guaranteed to beat the return generated from paying down a mortgage. Thus, Cooper’s (relative) outperformance compared to a passive investing strategy is just luck.
Finally, keep in mind these investments would be generating approximately $7,000 per year in dividends. That would be another passive income source which could be used in case he ever needed it.
There’s also the years Cooper missed investing. Back when I looked at the 15 vs. 30 year mortgage debate, I came to the conclusion the 30-year loan was best because lower mortgage payments gave someone the opportunity to invest more money sooner, which ends up being much more money later thanks to the miracle of compound interest.
Allow me to demonstrate this using Cooper’s numbers. Let’s assume he saves for 30 years from 27 to 57, getting a 6% return each year. In the first scenario, he only saves $80,000 per year from age 30 to 57, earning 6% the whole time.
As you can see, Sean “don’t call me Anderson” Cooper is hardly screwed if he foregoes saving for his future for three years while he’s paying off the mortgage. But just for shits and giggles, just how much would he end up with if he invested his money for the full 30 years while paying off the mortgage on a regular schedule?
The numbers don’t lie. Sure, Cooper would have paid about a hundred grand in extra interest if he would have stretched his mortgage out to 20 or 25 years, but he would have ended up with about $1.3 million more. So one way of looking at it is Sean’s decision to nuke his mortgage cost him more than a million dollars.
Now let’s face it. It’s not like he’s screwed by doing it his way. If he keeps up his savings rate, he’ll end up with an assload of money either way. A large savings rate can erase a lot of mistakes.
Not all of us are blessed with Cooper’s ability to work 100 hours a week or live happily in a basement. We could all probably adapt to such a life if we wanted to. It’s just very few of us do. Which is why there was so much scorn from anonymous internet commenters.
Let’s wrap this puppy up
At the end of the day, it comes down to this.
Sean Cooper’s accomplishment of paying off a quarter million dollar loan in three years is pretty impressive. The man deserves kudos for pulling off such a feat.
Additionally, Sean’s impressive savings rate means he can make decisions with his money that aren’t really optimal. The fact is investing for the long-term will prove to be more profitable than paying off a mortgage — provided that returns average what they have over the last century. When you save almost six figures a year and live extremely frugally, you don’t need to optimize. You just need to not screw up very badly. He’s done that and more.
Next step for Sean is hopefully getting himself a lady and taking a step back from his 100-hour work weeks. When he does, I’ll be the first to give him a virtual high-five. But unless you value what I believe is a false sense of security over ending up with the most money, follow Sean’s advice on saving and living frugally, and ignore his debt killing philosophy. Ultimately, conventional advice should end up making you richer.