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Rebel Finance School 2024
Last year on Rebel Finance School we were going through our content as always, but something changed. The course participants started commenting in the chat and it stopped us dead. This is one of the reasons I LOVE Rebel Finance School as there is ALWAYS something for us to learn, something always changes.
We teach the simple steps to wealth:
- Get an emergency fund of £1000 (whatever that is in your currency)
- Pay off expensive debt (greater than 5% interest)
- Increase emergency fund to 3-6 months of expenses
- Start to invest and buy assets
Our advice on debt was simple, expensive debt was anything over 5%. However what changed last year was that rising inflation, sky rocketing interest and the aftermath of meant a huge number of people were finding that their student loans and mortgages were suddenly becoming expensive debt under our definition.
We were inundated with messages. Does this mean we should stop investing and pay down our mortgage?
Do I need to take my 3-6 month emergency fund and pay off the mortgage / student loan and then go back to rebuilding it after I am mortgage free? This could take decades!
High interest rates seems to have changed everything! Or did it?
Classification of expensive debt
We classified expensive debt as anything over 5% for one simple reason. We felt that if the stock market returned 10%+ and wasn’t guaranteed then you might as well pay down debt quickly over 5%.
Whilst interest rates were low, which they had been ever since the financial crisis of 2008, this made a lot of sense. As interest rates sky rocketed after covid it meant that mortgages and student loans suddenly got categorised as expensive debt as well.
So we now have 3 options
- The Donegans reclassify what expensive debt is
- We come up with a strategy for dealing with times when interest rates goes up
- Or we stick blindly to the original plan, follow the steps rigorously and keep going
As you probably know we are huge fans of maths over emotion when it comes to your finances so the first step is to understand the math.
Simple interest rate maths
Simple interest rate maths.
The higher the interest rate on your loans the faster it compounds against you. What this means is that if you owed money at different interest rates you would pay different amounts of interest that get exponentially bigger as the rate goes up. Let’s look at some examples
Let’s imagine you have a £10,000 loan over 10 years. Here is what you would repay depending on different interest rates.
- At 1% interest, you would pay back a total of £11,046
- At 2% interest, you would pay back a total of £12,190
- At 4% interest, you would pay back a total of £14,802
- At 8% interest, you would pay back a total of £21,589
- At 16% interest, you would pay back a total of £44,114
- At 24% interest, you would pay back a total of £150,518
- At 50% interest, you would pay back a total of £576,650
At 1% interest you pay £1,046 interest. Not too much. If you add an extra percentage point you pay £2,190 which is a little over double.
You might be thinking why is the interest I pay back over double when I only doubled the interest rate. That is compounding.
The higher the interest rate the faster your debt compounds against you. If your interest rate is 8% you will end up paying back £11,589 in interest which is more than you borrowed! And that is only 8%. Do you know what the interest rate is on credit cards?
Katie got super excited and wondered if we could visualise this on a chart! She did.
The blue line shows what our brain thinks happens to the interest we pay if it just doubled in a linear fashion with the doubling of interest rates.
The orange bars show what really happens as the interest exponentially compounds against us crippling us with more and more repayments.
You would think that is the interest rate doubles from 16% to 32% then you would double your repayments. In reality you end up paying 5 times the amount of interest.
Is 50% interest even possible?
On RFS a couple of years ago we were doing the debt case study and the people we worked with had an overdraft balance. This balance was at 50% interest. Katie and I were both shocked, we felt like this was criminal and surely should be illegal!
Over 10 years they would have gone from a £10k debt to paying back £576,650. Yes you read that right they would have had to pay back over half a million pounds on that debt. They were NEVER GOING TO PAY IT OFF.
This is the exponential nature of debt and something we have to be hugely careful with. 1% point as we show with fees can be worth hundreds of thousands over the decades.
The higher your interest rates goes the more sense it makes to pay it back quickly.
What could you earn in the stock market?
Since inception the fund that Katie and I have invested in, the Vanguard FTSE Developed World Ex UK has returned an average of 13.6% a year. Pretty amazing right.
So if you choose to pay off you 4% mortgage instead of investing that extra money you would have got from investing vanishes. You are making yourself MASSIVELY poorer by paying off the mortgage when compared to investing in the stock market. Read the article should I pay off my mortgage or invest here.
People are then saying “Does that mean if my interest rate is less than the stock market returns then I should pay off the debt slowly and invest instead?”
Probably not as those gains are not guaranteed. There might be a few bad years and you might get 7% average. This is the risk. Do you take a guaranteed “return” of 7% paying off the debt or a possible 10% plus in the market that is guaranteed?
The steps to getting wealthy
Let’s step back and look at the steps to getting wealthy and how all this chat of interest rates, inflation and exponential debt affects them.
- Get an emergency fund of £1000 (whatever that is in your currency)
- Pay of expensive debt (greater than 5% interest)
- Increase emergency fund to 3-6 months of expensive
- Start to invest and buy assets
The reason for the first step is that if you have an emergency then this small fund will protect you from having to go further into debt.
The second step was designed to help you know which debts to get rid of first and have a clear plan to get out of debt. This step is really the foundation of the debt attack strategy. The questions from our audience came from the fact that under our definition of high interest rates debt, their mortgages were reclassified.
The questions we get asked are:
- If my mortgage / student loan rate is over 5% do I put all my emergency fund against it and go back to step 2?
- Are you saying that if my mortgage rate is over 5% I have to pay off the whole darn thing before investing? This will take decades!
- Are you saying I should stop my pension contributions at work and redirect them towards my mortgage?
Things to think about:
- Interest rate: a 1% difference can make a HUGE difference as you have seen above. If it was me and my mortgage had gone to 6% knowing what I know now I would have still invested first and not reclassified it as expensive debt. If it had gone to 7% I would probably be paying down that mortgage as quickly as possible first
- Employer matched contributions for pensions: I would not be stopping employer matched contributions for my pension to pay down debt unless my interest rate was ridiculously high. This is because you are putting in say 5% of your pay, the employer matches that 5% basically giving you an instant 100% return and then it grows in the market afterwards. This is FREE money and amazing growth. I would be taking the free money even if my interest rate was 10%.
- It’s not binary: Katie’s favourite expression. If your mortgage was say 6% and you had a decent gap then maybe you could put half the gap to investments and half to paying down the mortgage. It is never binary and you have many options available to you.
- What does the future hold? This is where we get out our crystal ball and make some stuff up! This is not going to be accurate. And actually Katie and I repeated to ourselves that mortgage rates can only go up for the 10 years we had a mortgage and they NEVER did! We locked into an interest rate to our detriment! So no one knows. We could debate this forever and one of us will be right. I am eternally optimistic!
To directly answer your questions:
- If my mortgage / student loan rate is over 5% do I put all my emergency fund against it and go back to step 2?
It depends on the interest rate. It is was 6% I would not. I probably wouldn’t change my plan very much. If it was 10% interest rate I would probably throw everything I have got at it. - Are you saying that if my mortgage rate is over 5% I have to pay off the whole darn thing before investing? This will take decades!
We come back to interest rates and how far north of 5% we are. If it was 6% I would probably not change my strategy. If my interest rate was 10% I would absolutely be paying it down till interest rates go back down again. Remember things change and high interest rates won’t last forever. - Are you saying I should stop my pension contributions at work and redirect them towards my mortgage?
I don’t think so. Matched contributions are MAGIC and I would still be putting my cash in to get the free match and building my pension. This is still tax efficient.
The better you understand interest rates, inflation and the maths behind all of this the clearer you will see the situation. Maths and numbers bring clarity and remove the fog of overwhelm and panic.
Take control of your fears through maths and understanding the numbers at a deeper level.
I would LOVE LOVE LOVE to know your thoughts and questions. Stick them below and we will further develop this article to help us all.
Thanks for reading and here is to a bright financial future for all of us
Love Katie and Alan
HI Alan and Katie,
I think the answer also depends on the type of mortgage you have. Let’s assume you have a 30 year fixed rate mortgage at 6%. Assuming it is a typical (American) mortgage and you have an option for recasting or reamortizing the mortgage for not too terrible a cost (my last reamortization was ~$175), and you throw additional money to pay down the principal for a few years. You could throw enough at it to effectively reduces the total APR you’re paying for the mortgage life to less than the 5% threshold, then reamortize/recast the loan (which should NOT change the terms, but will reduce your mandatory monthly mortgage). This will reduce how much your minimum mortgage payment is, while having that portion of the principal paid off permanently so you’re not paying interest on it, and free up that cash from the overpayment (plus if you wanted to, the gap between the original principal payments and the new amortized payments) to bulk up your emergency fund and then look to invest. This may not be an option for every type of mortgage- the one I am in now does not offer this, but I have done this with a previous 4.65% APR mortgage to reduce my monthly cashflow. This does usually require some amount of principal paydown, either in a lump sum, or over a threshold amount over some time (e.g. my bank required $10k or more principal paydown above and beyond the normal paydown schedule). It’s a strategy to consider, but may feel more complicated to a beginner. It doesn’t change the loan terms, interest rate, or total length of the loan, which I like, and should (I emphasize this a lot. someone else who lived in a dirt cheap cost of living area would have been charged $3000 for this) be much cheaper than a refinance. What it does do is re-calculate how much principal paydown you’d have for the remainder of the loan.
Due to a separation at age 48, I’ve taken on a 30 year mortgage to a small owner occupied property for me any my kids. I don’t have a huge amount in investments at this stage and am behind the game. Currently I am putting as much as possible into investment to catch up, but it currently has my mortgage being paid off at age 76. I’m not comfortable to have a mortgage accruing interest beyond whatever date I retire. Is it right to change up my plan so that my mortgage is paid off at the point at which I retire (even if this means I will need to work for longer)?
Rebecca, I think as long as you have enough in income each month from pension/investment drawdown to pay your mortgage payments, there’s no need to have it paid off by the time you retire.
Charlotte, this is a great response and I feel the same way. There is this thing that you HAVE to pay off your mortgage. But if your investments cover it and you don’t want to because it is best mathematically you don’t have to. I kind of want to buy a house and have a mortgage in retirement just to show it is possible from cash flow from investments!
My mortgage is at 1.92% which ends next May (5 year fix) Inevitably the interest rate will at least double next year, if not more, so I have been using my gap to make overpayments to bring the balance down before my mortgage renewal which will, which will have brought it down by £4250 by the time the mortgage renewal next year, given that it is a short amount of time, and not long term ‘investment’ , would you consider this to be the right approach?
Hey Natasha, when you say it is a short amount of time do you mean until you pay it all off? if the mortgage doubles to 4% that is still not high. In general we talk about less than 4% set to minimums and don’t pay it off quickly. 4-6% personal preference. above 6% interest then pay it off fast before investing. I am not sure about your whole situation so can’t really say what I would do as I would be asking about your job, security, emergency fund, what else you have going on financially…. Sending you happiness and did this give you an idea? Alan
I’ll do this for you if you like, Alan! I’m divorced and trying to keep the family home for as long as my kids are coming home half of the year (at uni) so looking to get my own mortgage (currently on a shared one with their dad, my ex, though I pay it) to keep for as long as I need it, so I can keep my ISA and SIPP which, now I’ve done the course, I’m going to very soon be moving to low fee, diversified global index funds! I was literally about to pay the mortgage right down and give my ex his bit of the equity by emptying my savings, but now a mortgage in my own name, even into retirement, seems the best way forward. I can’t eat the bricks! I may well have to fix the rate or go for a tracker, for just 2 years initially, then downsize if / when the monthly payments get tricky, but that’s ok. Thank you so much for the course, amazing stuff. Am passing it on to many people including my kids.
Ali, LOVE that you have done the sums and working through this and taking control. There is nothing wrong with having a mortgage even though the world seems to say the goal in life is a paid off house! We will, if we buy a house again in the future probably use debt to do it so we keep our money invested. Love that you are thinking through the options and making decisions. Thanks for telling us and sending you huge happiness. Alan
I would love some advice! My gap is about £400 a month. Have emergency £1000. My mortgage is hideous 8% interest. I have £86k left on it. Fixed rate ended 2 years ago and cant get another mortgage because of circumstances. Stuck with this lender. Chip away at mortgage or half to mortgage half to invest?
Kerri, you’re in the thick of it — 8% is high. Here’s our thoughts:
1. Every extra pound you pay off your mortgage is a guaranteed 8% return. That’s a reasonable return. yes you could earn more in an index fund but not that much more.
2. If you can’t remortgage, focus on paying down the balance. It’s the fastest way to reduce your monthly pain.
3. If you want to keep investing, do a small split (maybe 75% to mortgage, 25% to investing) just to keep the habit alive.
Keep your emergency fund safe — don’t drain it for the mortgage. if you are working then absolutley keep your employers match!
Did that help at all with your decision?
Peace and pineapples.
Katie and Alan
Thank you so much Alan, yes, dreadful situation but could be worse. We will keep chipping away at mortgage.really appreciate the course!
Let us know how you get on Kerri! sending you positivity! Alan
Our mortgage rate will jump from 1.89% fixed to 6.58% SVR in two days time. We didn’t want to fix again at this point as the rates are so abysmal at the moment so we thought we’d try our luck with waiting what the rates do over the next year. We have an offset mortgage, so decided to divert most of our savings and top up the offset saving account to the max mortgage value, to basically not have to pay any interest. Having watched your RFS wk4 episode this week, I did question whether this was the right strategy. My husband, who I have now realised is a lot more risk averse than me, is not keen to risk losing a 6.58% guaranteed return on our money for a potential 7,8,10%+ in equities. So we will go ahead with this plan but as soon as rates start coming down I am hoping to fix at sub 5% and I would like to start diverting some of it onto equities.
Sarah, this sounds like a really thoughtful plan.
At 6.58%, using the offset is basically giving you a guaranteed 6.58% return on that cash because it stops you paying that mortgage interest. That is not nothing. That is a strong wind in your face that you are neutralising.
Could equities do better over the long term? Yes, possibly. But not guaranteed, and definitely not smoothly. Your husband is not being silly wanting the guaranteed 6.58%. That is a reasonable position.
Tiny Donegan distinction: this does not have to be binary. Katie would be shouting IT’S NOT BINARY!
You could:
1. Fill the offset for the guaranteed mortgage benefit.
2. Keep watching rates.
3. If you fix lower later, start diverting some of the gap into equities.
4. Keep talking with your husband about risk, sleep and what helps you both stick with the plan.
The investing weeks will be super interesting to do with your husband too! And the best thing about the offset mortgage is that it is a flexible decision, if rates go down you can fix and then invest the sum so this is SUPER flexible. good work.
Question for you: if rates stayed above 6% for longer than expected, would you still be happy with the offset plan?
Thanks for commenting.
Peace and pineapples.
Katie and Alan
Thank you Alan. Because the offset is fully topped up, it doesn’t really matter what the rates do, they could continue to stay above 6% or go to 10%, we still wouldn’t pay any interest. But I would definitely want to reconsider if rates went down and I could get better returns elsewhere. We retire in 12 months time, so having taken care of the mortgage and emergency funds, any gaps we generate between now and then I would like to invest.
Thank you for reading and answering to everyone’s comments, I wish the BBC article picked up on the amazing educational job you both are doing.