It is a question some ponder. What to do first?
When we realize how important tending to our financial life is, we can sometimes come to the dilemma: where to focus our attention.
If we are paying a mortgage, then we are aware of our (usual) monthly payment. We tend to aggregate all financial obligations and see if there is any remaining balance from our income. And if we happen to have a surplus, we start to wonder… what is the best use of these funds.
Savings are important. We should have an emergency fund plus additional savings. Once we feel somewhat stable, we then can see possibilities.
A common question is whether it is better to pay off the mortgage early, or invest. Let’s look at this.
Debt or Debt
There is a different question that some participate in, which is not really the point of this post. That secondary question is whether paying off a mortgage early is a good idea. This thinking revolves around the idea that mortgage debt is somehow “better” than other kinds of debt. While some debt is worse than others (think credit card or other kinds of consumer debt), my opinion is that the less debt one has, the better. I favor paying off a mortgage before retiring. Having a major debt hanging over one in retirement is not my idea of fun.
The Original Question
So, if one has some surplus funds, determining where to deploy it is the focus. After an emergency fund is established, after the daily and monthly needs and obligations are covered, after longer-term accounts are funded, then where is one to aim? Each person needs to take into account their own needs and responsibilities.
On the one hand, paying off the mortgage will accomplish several significant goals. It alleviates the ongoing stress of having a large debt. Freeing oneself from ongoing debt cannot be overrated, it is a significant relief to do so. In addition, freeing up the money that went to monthly mortgage changes one life financially.
About Paying Off
However, it is also important to know that mortgage payments are still due regardless of one’s later abilities to pay it. For example, if I had paid substantial sums for extra mortgage payments, but later experienced a job loss, those extra funds paid of course were no longer available if I then needed cash. So maintaining a balance between extra payments and my ability to continue paying the mortgage is essential. (This is one reason I never also stopped adding to savings.)
On the other hand, investing all funds in the market has its own dangers. The market can be fickle, and any major financial strain that left me without a financial cushion could itself jeopardize payment of the mortgage.
My experience
In my situation, I realized that if I had allocated all surplus funds to paying off the mortgage early, and waited to invest until that task was done, I would be in a reduced circumstance, always playing catch-up. Waiting to invest handicaps one’s time, as the famous saying goes: “Time in the market trumps timing the market.” So when I found myself with enough funds, I went in both directions at once. I added to my mortgage payment so as to reduce my principal each month, and I also put funds into dividend stocks.
It became a personal decision as how to split the funds into three parts. Additional mortgage payment, investing, and increasing savings. There was no perfect way, just a way I felt comfortable. And I did it.
What is your approach? Extra mortgage payments or investing, or both? Let me know here.
The picture of the pheasant “hierophasis dissimilis”, also known as “Swinhoe’s pheasant” is from the 1914 Italian journal “Rivista italiana di ornitologia.” Courtesy Biodiversity Library at the Smithsonian Institution.
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