I love living mortgage-free. The freedom our family has after we decided to pay off our mortgage early is incredible.
But just because I love my paid-off house, doesn’t mean I think everyone should rush off and do that right away. There are other important financial actions to consider first.
To help us discuss those other money moves, I’ve invited Brian Preston, from The Money Guy Show, on the podcast today.
Brian Preston's Wealth Multiplier
There's a good chance you've heard someone (maybe even me!) shout the benefits of being debt-free. Brian Preston says, “Not so fast.” He invites people to consider how much their money is worth now and later before making any debt payoff moves.
In fact, Preston says that every dollar you have in your 20s and 30s has exponential value down the road. As an example, he points out a 21-year-old with a single dollar in his pocket could actually have $88 when they reach their 60s. To contrast, a 40-year-old with the same single dollar is only going to have about $4 in their 60s.
Because your dollars are so much more powerful when you are young, Preston cautions against spending too many of them paying down low-interest debt.
He's quick to point out that he doesn't want anyone carrying debt into retirement. The math is undoubtedly different when you are in your 40s and 50s. But as someone in their 20s or 30s, there is likely a way to allocate your dollars that makes more sense (at least mathematically!).
Financial Order of Operations
Are you wondering what money moves make the most mathematical sense? Brian Preston has a formula for you to follow. Specifically, this is his financial order of operations.
Step 1: Cover Your Deductibles
The first step is all about your deductibles. A deductible is how much you need to pay before the insurance company picks up the slack. Preston says a good rule of thumb is to total up your deductibles and make sure you have at least that much set aside in cash.
Deductibles to consider include:
- Health insurance
- Property (homeowners or renters) insurance
- Auto insurance
- Other insurances that apply to your specific situation
By doing this, you now have basic protection. That means you won't put your financial future at risk if something bad happens.
Step 2: Get Your Employer Match
If you have a workplace retirement plan, get your free money! Ask if your employer matches any of your investments into your 401k, 403b, or similar plan. In some instances, employers will match 50% or even 100% of your contributions up to a certain dollar amount. By skipping this step to pay off your mortgage early, you could be losing out on thousands of dollars each year.
Step 3: Pay Down High-Interest Debt
Do you have credit card debt? Maybe you have other unsecured loans? If you are paying 10, 15, or even 20% on your debt, you want to tackle this next. If you only make the minimum payments on this kind of debt, it will be decades before you build financial momentum.
Step 4: Build Your Emergency Reserves
Brian Preston suggests that someone in the workforce should have 3 to 6 months of living expenses set aside. As you near retirement, that number goes up to 18 or even 36 months. That way, you can weather any market uncertainty.
Step 5: Make Roth and HSA Contributions
Next on your list is saving for retirement, says Brian Preston. For more flexibility and control, you can invest in a Roth IRA. You may also want to explore your HSA as a triple-tax-free savings option!
Step 6: Max Your Retirement Options
After you've maxed out your Roth and HSA options, then you can circle back to your company retirement option. For most people that means contributing more to your 401k. Hopefully, you will eventually max it out. But you can work up to it gradually as your income grows.
Step 7: Focus on Hyper-Accumulation
Now you can focus on hyper-accumulation. What is that? Brian Preston says this is a super-saver status. This level unlocks when you are saving about 25% of your gross income. Saving–and then investing–this significant slice of your income secures your financial future.
Step 8: Prepay Your Future Expenses
The next step is saving for all the nice-to-have and nice-to-do things in life. Perhaps you want to buy an investment property or a vacation home. Maybe you want to set money aside for your kids' college funds. This is the step to do that.
Step 9: Make Low-Interest Debt Prepayments
After completing all those other steps, tackle your low-interest debt prepayments. It's definitely a mindset shift if you are someone focused on becoming mortgage-free as fast as possible. But Brian Preston says this makes the most number sense.
Why People Make the “Wrong” Mathematical Choice
You've heard us say it hundreds of times: personal finance is personal. That's why it's difficult to come up with one-answer solutions for people's financial questions. So when it comes to your debt payoff journey, you might not find yourself agreeing with Brian Preston.
That's likely due to a psychological or emotional reason rather than a mathematical one. His wealth multiplier already proves that investing your money in your 20s and 30s is likely to put you leaps and bounds ahead of someone who pays off their mortgage 15 years early.
So why do so many people pick debt freedom?
There are several reasons! The first reason Preston mentions is how easy it is to extrapolate. People savor the moment that they pay off their credit cards or their student loans once and for all. Afterward, people naturally assume that if that kind of debt freedom feels that good, mortgage-free must feel even better. (And I'm not going to lie–it really does!)
Additionally, many people view investing as daunting. The market news headlines do a great job of spreading doom and gloom. As a result, people often look at investing as risky, or even a form of gambling with their money.
Unfortunately, people often miss out on a lot of wealth-building because of this. Index funds are a low-cost, low-effort way to grow your money. While people worry about risk, Preston points out that if you are investing over a 20- or 30-year period, there has never been a timeframe historically where your money would have not recovered from a downturn.
It's true that past performance can't predict the future, but you want to make sure that you know if you're making a mathematical decision or a psychological one. Either is OK–just be honest with yourself and consider your options!
Final Thoughts on Brian Preston and Why You Might Not Want to Pay Down Your Mortgage
Before you jump on the mortgage freedom train, you might want to crunch the numbers. If you are following the financial order of operations that Brian Preston offers, you might find yourself making different money choices. The most important thing to remember is that you want your decisions to fit your plan!
Guest Bio – Brian Preston
Brian Preston, CPA, CFP®, PFS – Brian is the founder of Abound Wealth Management and host of The Money Guy Show. Brian is a 3rd generation educator, and this desire to create educated clients led to the award-winning podcast and YouTube channel. He has been broadcasting for over 15 years.
When not helping clients reach success with simple, smart strategies, Brian loves spending time with his wife, Jennifer, and their two daughters in Franklin, TN.
Brian Preston Resources
Other Content You Might Like
- 10 Incredible Benefits of a Paid Off House
- How We Paid Off Our Mortgage in 5 Years
- The Disadvantages of Paying Off Your Mortgage Early
MKM Podcast Resources
- Thriving Families Facebook Group: Join our new FREE Facebook Community!
- Corporate Financial Wellness Presentation: Contact me to discuss how I can support your company's overall financial wellness.
- Recommended Resources: You won’t reach your financial goals without the right tools. Here are my suggestions!
Carpe Diem Quote
“There is not one path. There is not even the right path. there is only your path.”― Anonymous
What do you think? Should you not pay off your mortgage? Do you like the advice from Brian Preston from The Money Guy Show?
Please let us know in the comments below.