I know this is an eternal debate: should you pay off your debts or invest your money? Since the most important debt that you can have is your mortgage, we will take a look at what are the impacts of paying down your mortgage faster or using your extra cash flow to invest.
If you look at the investment return of US index ETFs, you will tell me that you are way better off paying down your mortgage faster than investing. I must say that it’s hard to think about investing when you see what happened in 2008. However, if you have a good asset allocation, you should be able to recover from 2008 within 3 years.
But let’s go a little bit further in your analysis. Should you pay off your mortgage or invest?
Pro “Paying Your Mortgage” Arguments
Being Debt Free
The first argument I can find is “being debt free”. While I can’t blame people who want to become debt free as soon as possible, I must ask them the following question: what will generate your income at retirement? Your debt free house? Nah! Ain’t gonna happen!
Don’t get me wrong, paying down your mortgage as fast as you can is a good thing. However, I think that one should reach a balance in order to build some assets at the same time.
Debt is Bad
This whole perception that having debt is a bad thing makes me sick. Why is it that bad? I mean, as long as you can easily make your payments (read not being over indebted!), there is nothing bad about having a mortgage. But then again, some people stress out thinking they owe money to the bank. Therefore, they want to pay off all their debts as fast as possible.
Pro “investing” Arguments
Make more money
If you have the choice of paying down your mortgage at a 4% interest rate or investing at a 6% investment rate, I guess picking the investment option is smart. This is a big debate as investment returns are not guaranteed (while the interest rate on your mortgage is!). However, if you take into consideration the power of compound interest, investing, even at 4%, is a better option than paying down your mortgage.
Build your pension
Another interesting argument is that investments generate income at retirement while your house will just be a source of expenses. This is why some people don’t consider their home as an asset; because it doesn’t generate money over time. So if you are looking to build a pension plan on your own (do you really count on the government to do so?), you are better off starting your investments at a young age.
Paying off your mortgage or investing? Find a balance
I think that the best option is to find a balance between paying down your mortgage as fast as possible and investing all your money. Why don’t you set a solid plan to pay off your mortgage such as making bi-weekly payments for the next 25 years? Then, you can take your extra cash flow along with any future salary raises and use them to invest money in your retirement fund.
If you get bonuses, I would personally invest them instead of paying down debts. But I am a big believer in investments ;-).