After you’ve paid off your debt and your savings starts to grow, you may stay to wonder what to do next. This is an exciting time for families as they start to make some major progress on their financial goals. Then the analysis-paralysis sets in as you ask yourself, “Is it better to pay off our mortgage, save or invest?”

That’s where Samme from Chicago is right now. And she’s wondering what to do with her money after becoming debt free. Here’s her question:

“I am married with 3 kids living in a Chicago suburb. We have two stable full-time incomes and have no debt except for a sizable mortgage. We have more than enough money to cover an emergency fund sitting in a savings account.

My husband and I cannot decide what to do with the extra – pay down our mortgage or invest it.

My husband has no concerns having the mortgage and paying it down per the terms and argues the interest rate is so low we can make more investing. I am in a different mindset of just wanting to get moving on the mortgage as a stepping stone toward financial freedom.

I heard a quote once about how you would never take a loan just to invest that money. Equally, we’ve both gotten comfortable sitting on a large savings account so we are nervous to take action in any direction.

Is there an objective decision here to make? What would you do and why?”

Samme, thank you for reaching out.

First of all, this is an awesome question, and congratulations to you and your husband for doing all the hard work you’ve done so far. Answering this question is just pure fun because you’re in such a strong financial spot. 

Let’s talk about the three financial goals you’ve mentioned. I think it’s good for us to separate them so we can talk about how you can proceed: 

1. Saving for an emergency
2. Investing more
3. Pay off your mortgage early

Saving Money

While it’s incredibly important to have an emergency fund, it’s also important to determine what size feels right for you. Because, in my opinion, a lot of money sitting in a savings account does not build wealth for you or create the financial freedom you desire. 

Recently, I proposed a question on my YouTube community page got some interesting responses. I asked, “How much money do you want in your emergency fund right now? What feels right for you?”

The responses were all over the place.

One person said, “$0! I want my money to be making money for me!”

Another commenter said, “I feel really happy with 2 years of expenses in savings.” 

And a bunch of other folks said 3 months, 6 months or 12 months.  

The financial uncertainties we’ve faced over the past 5 years have changed a lot of people’s typical response to this question as well.

For our family, we used to feel content with 3 months of expenses. After transitioning to a life of solopreneurship, having two part-time workers in the house and a potential recession on the horizon, 6 months of expenses is sounding mighty nice right now. 

So I guess my advice to you, Samme, would be to ask yourself the question:

“How much feels right to us right now?”

• 3 months? You said that you both have steady jobs and life isn’t too rocky right now for you. Is 3 months enough to feel comfortable?
• 6 months?  Does that feel better?

This is a question for both you and your husband. Whether it’s 3 months, 6 months, 12 months or 24 months, find the number that feels right to you. And don’t let anyone else tell you that your number is wrong or right. We’re using Crew for our emergency savings. They provide us with a high APY, currently 3.7% for both checking and savings, so we’re earning more on our money that’s sitting around. Our kids earn this high APY as well with their accounts.  Check out Crew using our partner link and get an additional 0.5% APY for the first three months.

Invest More

I appreciate living mortgage-free, but I also appreciate the freedom that has come from achieving Coast FIRE as well. This milestone was achieved when we saved and invested enough in our tax-advantaged retirement accounts that we could coast to retirement without any further contributions. 

As an example, our retirement account sit at around $750,000 today. If we don’t contribute another dime, we could have $2.2 million by the time we hit 59.5 years old. With the 5% rule, this will provide us with over $100k per year to live on (and this factors in inflation over time). Since we spend less than $100 per year today, we feel comfortable knowing we don’t need to contribute any more money toward our retirement. 

So if you’re yet to achieve Coast FIRE, I wouldn’t recommend paying off your mortgage early. 

If you have extra money after your emergency fund decision, consider doing the following:

• Increasing contributions to your workplace 401 (k) option (if your company matches)
• Contributing to an IRA (Roth or Traditional)
• Save and invest with a Health Savings Account (HSA)

I’d recommend funding these areas for a few reasons:

• You can help yourself have a comfortable retirement in the future
• You’ll save on taxes as all three of these options are tax-advantaged
• Hopefully, you’ll grow your money a lot more than it would sitting in a bank account

Paying off the Mortgage Early

Knowing that you and your husband are on opposite sides of this debate of investing more vs. paying off the mortgage, perhaps you split the difference. 

Look into these tax-advantaged retirement options and afterward, see how much you can throw at the mortgage. Based on what I’m hearing from you, it sounds like you might be able to do both. 

You don’t have to pay off your mortgage super fast. Throwing some extra money each month at the principal is a simple and easy way to build wealth and create some more freedom and options in your life, whether it’s 5 years, 10 years, or 15 years down the road.

You could, in theory, make more in the stock market as opposed to paying off your mortgage, but the peace and freedom that comes with a paid-off mortgage is something you just can’t put into a calculator.

Final Thoughts on Paying Off the Mortgage, Saving or Investing

In short, I would recommend the following if your goal is to build wealth and own more of your time soon:

1. Determine how much emergency savings feels right for you
2. Invest in tax-advantaged retirement accounts like a 401k, IRA or HSA until achieving Coast FIRE (check out our Coast FIRE Calculator)
3. And then pay more towards your mortgage until you’re mortgage-free

If you don’t have enough available cash to invest more for retirement and pay off the mortgage early, find a way to split the difference with your husband so you’re both getting the type of financial freedom you desire. 

If there are other things you want to do with your money, like updating your home, upgrading a car, or planning for a family vacation, that’s okay too! 

Use your money in accordance with your family values. This is your money. Use it how you want to. 

What do you think Samme should do with her money? Pay off the mortgage, save, or invest? Focus on one or go for all three?

Please let us know in the comments below.

Got a question like Samme? Leave me a voicemail here.