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 great spot.
Let’s talk about the three financial goals you’ve mentioned. I think it’s good for us to separate them out so we can talk about how you can proceed:
- Saving for an emergency
- Investing more
- Pay off your mortgage early
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 Instagram and Twitter and got some great responses. I asked, “How money do you want in your emergency fund right now? What feels right for you?”
View this post on Instagram
In 2020, I have felt a lot of comfort in having an emergency fund with 6 months of expenses. ⠀ ⠀ With pay cuts, a global pandemic and being a newbie entrepreneur, there is something calming about just having money in the bank.⠀ ⠀ Saving is personal. ⠀ ⠀ What amount feels right for you?⠀ ⠀ ⠀ ⠀ ⠀ ⠀ #personalfinance #moneygoals #recession2020 #emergencyfund #babystep3 #daveramseybabysteps #moneysavingtips #savingsbuckets #moneyinthebank #savingandinvesting
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 global pandemic, recession and large unemployment numbers has changed a lot of people’s typical response on this question as well.
For our family, we used to feel great with 3 months of expenses. After transitioning to a life of entrepreneurship, Nicole getting a pay cut earlier this year and our school going virtual in the fall, 6 months of expenses is feeling a lot better.
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 Samme 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.
I definitely loved paying off our mortgage early, but I also loved maxing out my retirement accounts. This way, I could build up my investment balances and not worry about retirement as much.
Being mortgage-free feels great AND the idea of Coast FIRE feels great too. Having enough in retirement to let your investments grow and grow for decades until you need it in retirement.
This all depends on where you are currently with your retirement investments and your age. (Which is information I don't have).
If you have extra money after your emergency fund decision, consider doing the following:
- Increasing contributions to your workplace 401k 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 sitting in a savings 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 each month 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
To wrap it up, in short, I would recommend the following:
- Determine how much emergency savings feels right for you
- Invest in tax-advantaged retirement accounts like a 401k, IRA or HSA
- And then pay more towards your mortgage
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! Money is for enjoying! Both today AND tomorrow.
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.
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