See Charlie Munger's YouTube video:

http://youtu.be/pqzcCfUglws

Editor: Crass Cash

If you're like me, than you're creeping up on being 30 years out from a traditional retirement age of 65.  I think a retirement age of 65 is bullshit, but I fully recognize that that's what will happen for the vast majority of people.  So here's a little piece of advice.  Never have a larger mortgage than you have now.  

Whether you live in the same house or sell and then buy another, make sure that you never take on more mortgage debt than you have right now.  This will help ensure that you will have your mortgage paid off by the time you retire in 30 years.  Assuming of course that you have a 30 year mortgage.   

I've heard some people advocate that it's ok or even a good idea to go into retirement with a mortgage.  Bullshit!!!  This is always a bad idea!  Don't do it!  The last thing that you need in your life is the thought that the bank could come and take your home.  

This goes for all debt as a matter of fact.  No auto loans, no mortgage, no credit card loans, no HELOC, no debt, no way, NEVER!      

Editor: Crass Cash

For you Dave Ramseyites you probably know this as a "debt snowball".  Don't forget that there are 2 components to a person's net worth: assets and liabilities.  When you use income to pay down your liabilities you are also increasing your net worth.  However, if you use assets or cash to do it, the impact on your net worth is nil.  It will however, increase the ability to increase your net worth going forward, hence reverse compounding. 

So with that said, here's why it's better to pay off debt (especially high interest) vs saving it.  The key is in the interest rate of the debt vs the interest rate of the investment.  I've personally seen people who have enough money in a checking account to completely pay off their credit card debt.  This is a horrible idea because you're probably making 0.1% interest on the checking account money and paying well over 15% on the credit card.  

"But I like the thought of having cash in case of an emergency."  That's fine and all, but then just use your credit card if the emergency happens!  The one nice thing about paying off debt with a high interest rate is that paying it off is one of the best investments that you can make.  Why?  Because when you pay off a card with a 15% interest rate vs not paying it off at all, it's like making 15% on your investment (which is a great return if you didn't know)!  Then after this is paid off, rebuild this emergency fund that you had.  

This is an area where Dave Ramsey and I disagree.  However, I'll be the first to admit that from an emotional standpoint his baby steps of saving $1,000 first and then paying off credit cards is probably a more effective approach.  I've never had a problem with credit cards, so it's hard for me to relate to the addictive nature of them.